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IMF: Chinese banks are disguising a massive amount of bad debt 

November 24, 2016

Jim Edwards, Business Insider

China's banks are disguising bad debts by turning them into "securitized packages" rather than writing them down as non-performing loans, according to the IMF. The "untradeable debt" comes from China's "shadow credit" world, which has generated a massive amount of credit that has the potential to become suddenly illiquid.

The debts consist of interbank loans in "a structure potentially susceptible to rapid risk transmission and destabilizing liquidity events," the IMF says.

The amount of "shadow credit" grew 48% in 2015, to RMB 40 trillion (£470 billion or $580 billion), the IMF says, "equivalent to 40% of banks’ corporate loans and 58% of GDP."

If any of this sounds familiar, that's because it is. It's similar in principal to the way American banks disguised bad mortgages inside securitized packages before the Great Financial Crisis of 2007-2008. Back then, US mortgage providers gave out too many loans to people who couldn't repay them. On its own, that should not have been a problem. A mortgage default only hurts the bank that made the loan. But banks bundled together packages of those mortgages and sold them as "mortgage-backed securities" to other institutions. Read more

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