Wednesday, May 25, 2016

SocGen Issues Dire Warning
On China's Non-Performing Loans
"China is still leveraging up rapidly, with its nonfinancial debt up to 250% of GDP .. The corporate sector and capital market liberalization that the authorities are pushing for has begun to destabilize the debt dynamics. The beginning of debt restructuring for SOEs, the biggest borrowers and underperformers, brings closer the prospect of bank restructuring – a scenario we think that has a probability of more than 50% over the medium term. As SOE restructuring progresses, it will also become more apparent that Chinese banks need to be rescued. We estimate that the total losses in the banking sector could reach CNY8 trillion, equivalent to more than 60% of commercial banks’ capital, 50% of fiscal revenues and 12% of GDP. The actual tally may still be years away, but could be more sizeable if problems continue to grow .. Given the immense challenges and risks inherent in the debt restructuring, it is unrealistic to expect a perfectly smooth process. Even if Chinese policymakers can come up with a sensible strategy and start implementing it tomorrow, the chance of policy errors – small or large – during the process would still be quite high. This is why we assign a 30% probability to a hard landing scenario over the medium term."
- SocGen's Wei Yao
LINK HERE to the article

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