Business Tianjin Magazine

China has the means to deal with its banking institutions' toxic assets, banking insiders and experts told the Global Times Monday, following a US short seller's claim that the Chinese banking system "is a mess."

Carson Block, founder and director of US equity research firm Muddy Waters Research, told the Sunday Telegraph over the weekend that the Chinese banking system is facing "an enormous amount of bad loans,

or loans waiting to go bad."

"The problems of China's lenders are greater than those of the Western banks on the eve of the financial crisis, but because they are State-owned, the government will most likely print money and prop them up."

This will have "dire consequences for the economy," Block said, noting that Muddy Waters views China as "a massive asset bubble."

However, Block did not disclose any exact data or any specific bank's name to back his story.

According to statistics released by the China Banking Regulatory Commission last week, China's commercial banks' outstanding non-performing loans (NPLs) reached 526.5 billion yuan ($85.7 billion) by the end of

March, a surge of 20 percent over a year earlier.

Their NPL ratio rose to 0.96 percent in the first quarter, up from 0.95 percent in the last quarter of 2012, representing a rise for the sixth consecutive quarter.

The rise in NPLs is believed to be associated partly with China's economic slowdown, because companies that borrowed from banks have had difficulty repaying due to their slump in profits.

"Although the NPLs have been increasing recently, the country's economy is still growing at around 7 percent, which provides a solid guarantee for banks' development in the long run," Zhou Jingtong, a senior

analyst at the Bank of China, told the Global Times Monday.

China's GDP growth was 7.7 percent year-on-year in the first quarter, its slowest rate since 1999. But it's still an impressive figure compared to other major economies around the world.

Guo Tianyong, director of the Research Center of China Banking at the Central University of Finance and Economics, echoed Zhou's view.

Some loans to local governments to fund infrastructure projects or to State-owned companies in certain sectors, such as steel, may face the possibility of default, but the total amount is small compared to banks'

total assets and loans, Guo noted.

However, some experts are less confident.

"It's difficult to calculate the exact scale of banks' toxic assets, as some are not shown in their financial reports. But they are big and dangerous indeed, and financial reform is vital, because otherwise it will be too

late," said Hua Min, director of the Institute of World Economy at Fudan University in Shanghai.

Hua also expressed concern over a possible bubble in China's M2, or broad money supply.

The central bank said M2, which covers cash in circulation and deposits, stood at a record high of 103.61 trillion yuan in March. And the ratio with China's GDP is close to 190 percent, which "means that banks are

holding assets that don't correspond to real economic products," said Hua.

"Banks are inclined naturally to lend more to make money. And when a loan becomes bad, it's depositors' money anyway, and the bank executives still earn bonuses and high salaries," said Hua, noting that the

practice is similar to that of Wall Street banks before the 2008 financial crisis.

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