China’s rapid economic expansion has led to a number of side effects. One of them is the soaring bad debt brought about by Beijing’s massive lending to stimulate growth.
China’s non-performing loan balance hit the highest level in 10 years after jumping to Rmb1.27 trillion ($195 billion) as of the end of last year, according to official data released by the China Banking Regulatory Commission.
However there is debate over the actual size of the country’s bad debt and many analysts believe that the figures have been underestimated. Kyle Bass, a hedge fund manager well-known for profiting from the US subprime mortgage crisis in 2008, estimated that the size of China’s non-performing loans to be at Rmb4.2 trillion, more than triple the CBRC’s estimate.
To help tackle the massive bad debt, Beijing said earlier this year it plans to allow commercial banks to swap NPLs on their balance sheet for equity stakes in borrowers.
But the programme has raised a number of questions, most notably how these commercial lenders would operate these zombie companies after taking equity in them.
