IF THE recent actions of China’s regulators are anything to judge by, its lenders need help. Over the past ten days alone, the central bank has pumped extra cash into the financial system, cut interest rates and lowered the portion of deposits banks must hold in reserve; the government has scrapped a ceiling on their loan-to-deposit ratios. The combined effect is to free more cash for banks to lend—a boost for banks seeking to improve the return on their assets as well as a prop for the sputtering economy and plunging stockmarket. The official data, though, suggest China’s lenders are still in rude health: bad loans make up just 1.4% of their balance-sheets. That is a touch above the level of the past few years, but still more than two-thirds lower than before the global financial crisis.
How to explain the discrepancy? One possible answer is that bad loans are a lagging indicator. It is only after the economy has struggled for a while that borrowers begin to suffer. Looked at this way, China is trying to anticipate problems, keeping its banks in good nick by sustaining economic growth of nearly 7% year-on-year. Another, more...Continue reading
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