In the first half of 2020, creditors gave new loans for a total of $1.7 trillion. China has outgrown bad debts in the past, but it certainly won't succeed this time. China grew by 3.2% in the second quarter, getting out a historic 6.8% cutdown in the first quarter. Recession stopped. Yet issues with debt are on the rise.
Many of the funds will benefit stable businesses in a tough environment, but government officials caution against increasing non-performing loans. According to PwC figures, that would have risen to $1,5 trillion in strained asset markets last year.
Many borrowers wanted help from the state, and new banks have emerged, such as the ones in the provinces of Hebei and Shanxi earlier this year. $3 trillion's confidence in a lending sector in this country has also been under threat, with major protests sparking a series of defaults.
How did the Bank of China help the banking sector?
In previous times, Beijing focused on so-called poor banks that purchased issue loans, mostly at nice fares and then sought to redeem or re-sell them. It helped the growth of a distressed bond market and prevented banks from having to lend without staining their accounts.
Chinese data suggest that the rebound is mainly the result of the government's intervention, with industrial production rising 4.8% year-on-year in June. In contrast, retail sales growth remained at -1.8% year-on-year.
Opportunities to attract international investors
However, even the big AMCs would refuse to take an endless number of worthless loans. Others also decide to avoid buying and diversifying to increase production. China's Huarong has bought 30% fewer NPLs from the banks this year in contrast to the previous year, with reserves kept at 1.7 trillion yuan by HongKong.
China has made it possible for foreign equity to enter the market to counter this move. Last year, international vulture funds were allowed to buy poor credit portfolios from the banks directly. Yet bureaucracy and simpler chances elsewhere meant that adoption was slow.
In the past, China's situation with bad debt has been overcome, but it probably will not happen this time. It would be easier to stop messing up and continue to write them off.