$900 billion in NPLs in China

Earnst & Young, the accounting firm, puts China’s non performing loans at an unexpected high level, $900 billion USD, surpassing their $875 billion USD reserve level.

FT update May 16: E & Y retracted the report

E&Y retracted the report, saying its estimate of bad debts for the
country’s big four state banks "cannot be supported and … is
factually erroneous".
(big snip)
In a statement issued with the retraction of its report, E&Y
resolved the conflict firmly in favour of its auditors, saying the
official figure was "computed on a regulatory and accounting standard
based on objective evidence of impairment". In a separate statement
yesterday, the accountant said the NPL report had erred by treating "unverified forecast data compiled by others as if it were historic
information".

Humm… an auditor feeling the pinch?

(from the original account)
This is FT’s account of the situation:

China still vulnerable despite war on bad debt
By Richard McGregor
Published: May 4 2006 01:15 | Last updated: May 4 2006 04:09

At first glance, Beijing would appear to have tackled
head-on the mountain of bad debt in its state banking system, debt
which has built up over some 20 years since the government began
opening the economy in the late 1970s.

In
1999 the government established bad-debt disposal companies to sell off
sour loans, used bank profits to wipe out more and also pumped in cash
from its foreign exchanges reserves to recapitalise the institutions.

In
all, China cleared about $560bn (€444bn, £305bn) of bad debts in a
flurry, an amount equal to about half the country’s gross domestic
product at the time the funds were deployed.

Therefore, after a
period during which China enjoyed boisterous economic growth rates, it
is surprising that a series of new reports say non-performing loans
(NPLs) remain stubbornly high and may be getting worse.

Guanshanyue1982_3

A report
issued yesterday by Ernst & Young, the accountancy firm, puts
China’s total liabilities for non-performing loans at just over $900bn,
even higher than its $875bn stack of foreign reserves, the largest in
the world.

The findings of the E&Y survey are broadly in line
with a report by professional services firm PwC, issued last week and
similar in tone to another lengthy report released this week from
McKinsey, the consultancy, on China’s financial system.

“I think
the numbers will be a big surprise because China has been giving the
impression [with its banks listing overseas] that the problem is behind
us,” said Jack Rodman, a managing director with E&Y. “China has not
really resolved the issue – they have just moved it from one state
enterprise to another.”

The three reports say the original stock
of bad loans has not been dealt with and that a huge stack of new NPLs
has been created.

So, what are the consequences?

In my opinion, their Yuan (USD/CNY) bites the dust; at least the
buildup pressure to appreciate it. In other words, their total surplus
should be considered a write off to credit the negative balance sheet
in their banking accounts.

Unfortunately, this takes a significant load off the declining USD,
which was instrumental in the required balancing of the US trade
deficit –what will Ben Bernanke do now to hinder the growing US
current account deficits?

Bottom line, cheaper Chinese goods are now justified…

Why do I get the feeling that the Chinese got what they wanted
sooner than anyone expected –they consumed their surplus with one blow
from an accounting firm report, quite a feat!

For further comments check Brad De Long’s and Mark Thoma’s blog.