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China Commercial Banks’ Bad Loans Expected to Rise in Q2, Regulator Says

China’s banking regulator said Wednesday that bad loans at the country’s commercial banks are expected to rise in the second quarter, due to difficulties faced by corporate and individual borrowers in repaying loans amid shocks from the coronavirus pandemic.

Lenders in China have disposed 450 billion yuan ($63.6 billion) worth of nonperforming loans in the first quarter, which was CNY80 billion higher than a year earlier, Xiao Yuanqi, spokesman and chief risk officer at the China Banking and Insurance Regulatory Commission said at a briefing.

However, the pace of bad loan growth is expected to slow in the second quarter as banks issued more loans to support businesses reopening after progress was made in containing the virus, Mr. Xiao said.

The banking regulator is keeping a close watch on the lenders’ asset quality and recently conducted stress tests for the banking sector, he said, without elaborating on the details or results of the stress tests.

Risks in the banking system are controllable given sufficient loan-loss provision banks have allocated in the past years, he said.

At the end of March, nonperforming loans at the banking sector accounted for 2.04% of total loans, rising above the 2% level for the first time in years. China’s economy also reported its first quarterly contraction in the first three months of the year, due to the coronavirus and the government’s control measures.

Commercial banks in China also delayed a total of CNY880 billion interest and principal payment as of end-March for small companies facing difficulties in repaying debt during the coronavirus. Outstanding loans to small and micro firms also rose 26% on year at the end of March as Beijing cut interest rates, subsidized loans and injected hundreds of billions of dollars worth of liquidity into the financial system to boost lending.

In response to reports of borrowers using subsidized loans to buy properties in the southern Chinese city of Shenzhen, Mr. Xiao said the regulator has urged commercial banks to check the use of loans and prevent funds being misused for property speculation.

In the same briefing, Cao Yu, the vice chairman of the CBIRC, said Chinese banks’ exposure to the fraudulent Luckin Coffee was quite small.

Coffee chain Luckin had on April 2 said that its chief operating officer and several employees had fabricated CNY2.2 billion ($310 million) in sales from the second quarter to the fourth quarter of last year.

Mr. Cao said that Chinese insurers, together with several overseas insurers, had sold directors’ and officers’ liability insurance with a combined claim of $25 million to Luckin. The insurance policy, which Luckin purchased before its U.S. stock listing, offers liability to the company executives in the event that they are sued by investors who believe their decisions and actions have hurt shareholders’ interests.

Some Chinese insurance firms have reinsured the policy, which could help shoulder their compensation payouts, Mr. Cao said.

Since the firm is still under investigation, it is unknown how much compensation Chinese insurance companies will have to pay, he said, adding that the regulator will cooperate with other departments in probing and penalizing Luckin Coffee.
Source: Dow Jones

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