China's regional banks approaching surge of non performing debt

China's small regional banks are rapidly approaching a surge of non-performing debt that threatens to undermine the financial health of vulnerable lenders.

The government had allowed small to midsized enterprises to defer principal and interest payments on loans, as part of the country's coronavirus stimulus package. The extensions were applied to 6.6 trillion yuan (USD 1 trillion) as of the end of December, Nikkei Asia reported citing the China Banking and Insurance Regulatory Commission.

However, these waivers from debt servicing are set to expire at the end of this month. "Nonperforming loans account for a higher ratio of debt subject to repayment deferrals than for normal debt," said Gu Shu, chairman of the Agricultural Bank of China.

Though small businesses suffered when the Chinese economy slowed in 2019 due to the trade war with the US, the situation worsened due to the COVID-19 pandemic. Roughly 2.3 million compes failed in the first half of 2020, or 6 per cent of the total, according to an analysis by the Peterson Institute for International Economics.

There are lingering concerns that bad loans that were once hidden will rise to the surface once the March 31 deadline passes, Nikkei Asia reported. Additional bad loans could grow as much as 700 billion yuan this year, according to a projection from China Securities.

Last year, the Chinese took 200 billion yuan in proceeds from infrastructure financing bonds and injected the funds into small and midsized banks. Critics have said that reliance on public funds leads to moral hazard.

In 2018, the China Banking and Insurance Regulatory Commission and the People's Bank of China (PBOC) embarked on a campaign to deleverage debt, but the financing at private-sector enterprises suffered, Nikkei Asia reported.

The PBOC sought to pin the blame on the finance ministry, deepening mutual distrust between the two sides.

( With inputs from ANI )

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