Banks are tricking Chinese clients with exorbitant loan terms, a China specialist tells finews.asia. The upshot? China's affluent and wealthy are massively overextended as global tensions rise.
By Shruti Advani, Editor-at-large, finews.asia
Banks with onshore lending operations in China are struggling with rising non-performing loans, or NPLs, amongst both corporate and private banking clients. The contagion has spread from the company’s balance sheet to personal wealth.
While most mainstream media attribute the worsening liquidity situation to the sharp fall (in excess of 20 percent) in the benchmark Shanghai Composite Index since the start of the year, one well-respected China analyst disagrees.
Funding Lavish Lifestyles
The advisor, who consults to banks with onshore ambitions, and hence prefers to remain anonymous, believes the problem is systemic. «I would estimate that 60 to 65 percent of the owners of listed companies have pledged their shares for a line of credit from the bank which they are using not just for investment but also to fund their lavish lifestyles,» he explains.
He stresses the rot is not limited to select mature companies who typically use large credit facilities to manage cash flow, but includes «newly-minted billionaires» – the very demographic private banks have built ambitious onshore platforms for.
Dud Loans to Rise
And the malaise continues to spread down from the uber-rich to those who are merely wealthy – small and medium enterprises, or SMEs, and their owners have not been spared. «The billionaire’s troubles are well known but what is not as visible is the problems with the SMEs,» the expert – who is a Chinese national – warns. «They are facing tremendous liquidity pressure.»
The China Banking and Insurance Regulatory Commission’s latest estimates peg NPLs at $282 billion at the end of the second quarter of the year. With no visible respite in the trade tensions between the U.S and China, the consensus estimates are for this figure to continue to rise.
Desperate Measures
The desperate times have led some banks to take desperate measures. «Banks are tricking borrowers,» he says, by persuading them to retire old debts with the promise of new ones at more attractive rates.
Clients resort to «bridging loans» to repay the banks, in the hope that the bridging loan will be paid off with the fresh loan from the bank. «The bridging loan comes from loan sharks at an interest of 36 to 60 percent per annum,» he elaborates. «In quite a few cases the promised new loans from the banks never materialize.»
In Liquidity Trap
How dramatic is the situation? «Without question, entrepreneurs on the mainland are over-leveraged,» one Hong Kong-based multi-family office executive confirms.
«They find themselves in a liquidity trap, banks are tripping over each other to be the first ones to collect and in the process they are making promises that they have no intention of honoring.»
She believes these debtors have been caught in a tailspin with banks cleaning up balance sheets and the Government cracking down on shadow banking – their two traditional sources of funding. «Some will no doubt survive the crunch but banks and investors are both scared that many will not.»
