This week the Bank of China, the country’s fourth-largest lender, reported local-government loans of $82bn (£50bn), 8.7% of the loan book and up from $58bn at the end of last year.
Last week, interim results from China’s fifth-biggest bank – the Bank of Communications – revealed $48bn in local-government financing loans, 12.6% of the loan book and double the $24bn reported in Q1.
The reason for the jump was new transparent accounting practices required by the China Banking Regulatory Commission, obliging banks to move some loans previously thought as corporate into the local government column.
Robin Parbrook, head of Asian equities at Schroders, believes the next five years will be crucial for China. However, he said it was hard to know for certain whether the country’s leadership would take the bitter medicine necessary to move the economy from an investment-led to a consumption-led model.
“What we can say for certain is that the country must undertake a long and, maybe, painful process to deal with the issue of inflation and the extent of bad loans in the banking sector,” said Parbrook. “These issues can be managed over time if China proactively addresses them and genuinely moves to rebalance its economy.”
He believes that, while the numbers were bad, there is good news.
“China’s starting government debt-to-GDP is quite low so, while the losses are large, the numbers should be manageable over time,” he said.
