China's banking system has remained robust after two years of reform and risk reduction efforts and can handle bad debt increases brought about by the coronavirus (COVID-19) pandemic. It is unreasonable for western media to allege that rising debt would collapse China's banks, which have taken fewer hits when compared to US banks.
Capital value among US banks is estimated to drop 30 to 40 percent due to the pandemic, and with an almost zero interest rate, they face increased difficulties and risks. Fitch Ratings downgraded its outlook on the US banking sector from stable to negative. Meanwhile, capital value among China's banks is expected to drop 15 percent.
The 10 largest capital value banks worldwide will change as Chinese banks see rise among the ranks.
Although concerns are necessary, Chinese banks are in a robust position with ample resources to deal with rising uncertainties, including a bad debt ratio.
According to official data, the bad debt ratio for Chinese banking institutions was 2.08 percent at the end of February, 0.06 percentage points higher than that at the beginning of the year. Meanwhile, loan loss provisions reached over 6 trillion yuan, with a 181-percent provisioning coverage ratio, indicating that banks have 181 yuan reserves for every 100-yuan bad loan.
China launched a risk-reducing campaign in 2018, with the core task of delimitating financial risks. Fragile aspects in the financial system have been located and observed with supervision enhancement. The eased macro leverage rate and the debt level of state-owned enterprises have formed a relatively loose space for the financial system to deal with the pandemic.
Since the outbreak in late January, Chinese governments have rolled out measures to guarantee market liquidity and shore up expectations. With months of all-out efforts to contain the virus, the epidemic in China has now under control and production has gradually resumed. Together with measures focusing on expanding consumption, the pressure on factories' liquidity will be relieved, which in turn will reduce banks' bad debt risks.
Chinese firms are under mounting pressure, especially for import and export firms, since the virus overseas is still spreading rapidly with deadly infection figures hitting newspaper headlines daily. These firms will draw more attention from authorities.
From the perspective of Chinese banks, though some of them are facing extreme difficulties due to their previous accumulated weaknesses, most of them have put rounds of measures in place in a bid to hedge upcoming risks.
For instance, banks have conducted pressure tests on different pandemic scenarios, and have increased preparation on loan loss provisions. The banks have also created services for different industries so they can return to normal operations as soon as possible.
China has been promoting reform and opening-up in its financial market for years, which has helped reduce risks for financial institutions.
The author is a vice president of the School of Finance under the Renmin University of China.
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