Update: Chinese bad loans soar by 41%, hitting an 11-year high

The China Banking Regulatory Commission has announced that non-performing loans at China's banks surged by 41.7% YoY, to RMB 1.39tn ($213bn) for the first quarter. As the nation's economy loses steam, rising bad debt is becoming an alarming concern for its financial system and if the economic slowdown persists, China's debt problem could get worse. Furthermore, as we have been highlighting, many analysts believe the NPL situation in China's banking sector is far more serious than official data suggests, since some Chinese banks adopt untimely loan recognition and turn to off-balance sheet lending to hide bad debts.

China's non-performing loans hit 11-year high - regulator

BEIJING, May 12 (Reuters) - Troubled lending at China's commercial banks reached 4.6 trillion yuan ($706 billion) at end-March, a jump of 428 billion yuan from December, official data showed, as the pace at which loans are souring has risen amid the country's slowdown.

Chinese commercial bank non-performing loans (NPLs) rose to an 11-year-high of 1.4 trillion yuan, or 1.75 percent of total bank lending, the China Banking Regulatory Commission (CBRC) said in a quarterly report published on its website Thursday.

At the end of 2015, NPLs accounted for 1.67 percent of all loans.

Separate from NPLs, "special mention" loans, or lending potentially at risk of becoming non-performing, rose to 3.2 trillion yuan by end-March, the CBRC said, surpassing 4 percent of total loan volume for commercial banks.

For Chinese lenders, the build-up of bad debts, which have increased for 18 consecutive quarters, followed the state-driven credit boom of 2009 and has shown no sign of slowing. This is making policymakers mull unconventional measures to prevent a potential debt crisis.

Beijing has given six banks a total quota of 50 billion yuan to issue asset-backed securities with NPLs as underlying assets.

Policymakers are also preparing to reintroduce debt-to-equity swaps, a measure that saved banks from mountains of bad loans in the early 2000s by asking them to convert their loans to troubled state-owned enterprises into shareholdings.

Many bank analysts believe the NPL situation in China's banking sector is far more severe than official data suggests, as some banks adopt untimely loan recognition and turn to off-balance sheet lending to hide bad debts.

In a report this month, CLSA said NPLs may account for 15 percent to 19 percent of loans.

The growing volume of troubled debt has pushed Chinese lenders to shrink their loan-loss allowance ratio - a measure of cash set aside as a percentage of reported NPLs - to a six-year-low of 175 percent in the first quarter, CBRC data show.

Two of China's Big Four state-owned lenders saw their Q1 provision ratio drop below a regulatory threshold of 150 percent, as rising bad debt write-offs eroded their capital buffers.