BEIJING • China's unprecedented jump in new loans at the start of the year is fuelling concern that excessive credit growth is piling up risks in the nation's financial system.
While part of January's surge in new debt to a record 3.42 trillion yuan (S$737 billion) was caused by seasonal factors and a switch into local-currency liabilities from overseas borrowings, the risk is that bad debts will jump as companies find fewer profitable projects amid the slowest economic expansion in a quarter of a century.
Soured loans at Chinese commercial banks rose to the highest level since June 2006 at the end of last year and the country's biggest lenders trade at a 33 per cent discount to net assets in the stock market - a sign that investors see further writedowns to banks' loan books.
I'm not anticipating an imminent meltdown, but we've got a lot of warnings going on that should make us cautious about how we see the situation developing for the course of this year.
MR GEORGE MAGNUS, an economic adviser to UBS Group, on the effects of China's debt burden
The jump in credit growth "may help to sustain the pace of economic momentum in the short term, but it's storing up big problems", said Mr George Magnus, an economic adviser to UBS Group, who correctly predicted last July that the rout in Chinese stocks would deepen.
"I'm not anticipating an imminent meltdown, but we've got a lot of warnings going on that should make us cautious about how we see the situation developing for the course of this year."
China's ratio of corporate and household borrowing versus gross domestic product rose to 209 per cent at the end of last year. Non-performing loans rose 7 per cent in the fourth quarter to 1.27 trillion yuan, data from the China Banking Regulatory Commission showed on Monday.
The increase in China's debt relative to GDP could pressure the country's credit rating, Standard & Poor's said on Tuesday.
"While corporate financial risks are not as high as what the leverage level suggests - as companies tend to hold a lot of liquid assets - the increase in the debt-to-GDP ratio still poses a systemic risk, which could potentially add pressure to ratings," Mr Kim Eng Tan, senior director of Asia-Pacific sovereign ratings at S&P, said in an interview.
China's long-term credit rating at S&P is AA-, with a stable outlook. That is the fourth-highest ranking and puts the country on a par with Chile and South Korea.
Chinese markets suggest investors are braced for a pick-up in bad debt. The nation's four biggest lenders by market value - Industrial & Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China - are valued at an average 0.68 times net assets in Hong Kong's equity market, near the lowest level on record, even after climbing on Tuesday amid a broader rally in equities.
The nation's main government organs have vowed to tackle overcapacity, safeguard the asset quality of banks as well as limit loans to "zombie" companies, according to a joint statement issued on Tuesday by agencies including the People's Bank of China, the National Development and Reform Commission and the Ministry of Finance.
"Although the government and other senior officials do talk about deleveraging and slowing credit creation, a lot of it is talk," Mr Magnus said. "We don't see very much in the way of concrete actions to try to limit the amount of new credit going into the economy."
Mizuho Bank has warned that the threat of bad loans is rising and Marketfield Asset Management said China's central bank may be losing its regulatory grip on credit growth.