Bad loans and the AMCs
There is a longstanding debate about the size of bad loans in China’s banking system. The shortage of data has made it difficult for external analysts to arrive at a comprehensive number that would clarify the banks’ actual financial position.
The level of non-performing loans (NPLs) within China’s banks has been greatly reduced over the past two decades by the creation of the central and local asset management companies (AMCs). These independent companies have bought a significant number of NPLs and then restructured, sold, or securitized them.
However, a new paper by three academics suggests that a substantial portion of the capital supplied to the AMCs has come from the banks themselves. The paper, “Hidden Non-performing Loans in China,” was published in January 2021 by Ben Charoenwong, Meng Miao, and Tianyue Ruan. These loans would suggest that the AMC debt is, in fact, an implicit obligation of the banks. As a result, the authors conclude that when the implicit AMC debt is included, the level of bank NPLs in the banks could be 2x to 4x the official figures. If accurate, this would increase the risks of financial instability in the economy. We examine the paper’s methodology, which has some flaws, and speculate on the implications for the economy.
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