China’s banks have a bad-debt problem

Bank of Jiujiang, a mid-tier lender from a southern Chinese river town, imparted some bad news on March 19th. In a rare disclosure, it told investors profits for 2023 might fall by 30%, because of poorly performing loans. This is just the sort of information Chinese banks are normally reluctant to reveal. Indeed, they often go to great lengths to avoid doing so.

Typically, the subterfuge works as follows: the bank lends to an asset-management company (AMC) that in return purchases its toxic loans. The contracts drawn up between the two parties include stipulations that enable the AMC to avoid the credit risks of the bad loans they are buying. Confidentiality clauses keep these arrangements from being disclosed, sometimes even to courts.

To regulators it may seem as if banks involved in such transactions are solving their bad-debt problems; in reality, they are concealing them. As Ben Charoenwong and Ruan Tianyue of the National University of Singapore Business School, and Meng Miao of Renmin University, have noted, over time these troubled loans accumulate. For hundreds of banks across the country, they represent a ticking bomb.