1. CHINA’S BAD DEBT CRISIS IN
2000’S AND STEPS TAKEN BY
THE CHINESE GOVERNMENT
SANDHYA C064
ASHISH E040
YASHVARDHAN E066
VANSHIKA H048
SOUNAK I001
ANKITA I050
AISHWARYA I061
KANAK I065
2. • China had started substituting imports with domestic
production since 2000
• The export of China grew year on year until 2007
• Global Financial Crisis led to a decrease in the external
demand leading to deterioration of the financial performance
of the corporates and worsening the asset quality
3. • In response to the Global Financial crisis(2008), Chinese government introduced a fiscal stimulus package
and encouraged domestic demand, hence increasing credit
• Credit growth-increase in corporate spending thus adding to productive capacity
• Public infrastructure sector - biggest culprit , encouragement by provincial govt
• The corporate debt has been increasing for more than 18 quarters now
4. CHINA 1998 BAD
DEBT CRISIS
• Bank loans to GDP - more than 120%
• Government encouraged loans to SOEs ,chronic loss-makers
• State-ownership was maintained, loss-making SOEs were rarely
liquidated and redundant workers
• The financial deficits of the SOEs had direct fiscal implications
• Exposure to SOEs - 83% of all loans from the big four
• Capital-adequacy ratio - 4.4 %
• Loan loss reserves 0.5 % of outstanding loans
• Solution - AMC , debt equity swap
5. 01
02
03
04
• Post GFC
stimulus not
matched by the
increase in profit
• Increased funds
flow from
households to
corporations
01. Higher and less
profitable corporate
investment
required credit
financing
• SOE’s -
Preferential
access to finance
• Borrowing cost not
commensurate
with risk
• Poor resource
allocation
02. SOEs have
been more
leveraged and less
profitable
• Non market
orientation led to
overbuilding and
huge stock of
unsold properties
• Led to over
capacity problem
in upstream
industries :
cement, steel and
coal
• Heavy borrowing
with falling profits
03.Inefficiencies in
credit allocation-
real estate and
infra
• Falling
Incremental
Capital to Output
ratio
• Increase in credit
intensity
04. Credit increase
more than required
finances
REASONS FOR RAPID CREDIT GROW
6. • Ch in a ’s b a n k in g s y s te m is la r g e ly d o min a te d b y la r g e s ta te - c o n tr o lle d
b a n k s in wh ic h th e s ta te p r o v id e s a g r e a t d e a l o f d ir e c tio n to b a n k s ,
th r o u g h a v a r ie ty o f r e g u la tio n s a n d fo r ma l a n d in fo r ma l g u id a n c e
• W h e r e b a n k s a r e d is c o u r a g e d fr o m le n d in g to c e r ta in in d u s tr ie s a n d a r e
ma n d a te d to o ffe r fr u s tr a tin g ly lo w in te r e s t r a te s o n d e p o s its , n o n - b a n k s
fill th e g a p
• Ab o u t two - th ir d s o f a ll le n d in g in c h in a b y s h a d o w b a n k s a r e " ba nk
loa ns in dis guis e “
• e x a mp le - c o r p o r a t e l o a n s r e p a c k a g e d i n t o i n v e s t me n t p r o d u c t s f o r r e t a i l
a n d in s titu tio n a l in v e s to r s a n d e n tr u s te d lo a n s
• As o f 2 0 0 6 c r e d it fr o m b a n k s wa s 8 5 % wh ic h h a s n o w c o me d o wn to 5 3 %
05. Shadow Banking
7. BIS REPORT (2016)
• China is within 3 years of a serious
financial crisis
• China’s credit- to-GDP gap
exceeded 30 during first quarter of
2016 .
• A figure greater than 10 indicates a
crisis is likely in less than 3 years
IMF REPORT (JUNE 2016)
China’s total debt stood at 225% of its Gross Domestic Product, out of which corporate debt
amounted to 145% of the GDP
• China’s total debt stood at 225% of
its Gross Domestic Product, out of
which corporate debt amounted to
145% of the GDP
SIGNIFICANCE OF THE
PROBLEM
CHINA BANKING
REGULATORY COMMISSION
China’s total debt stood at 225% of its Gross Domestic Product, out of which corporate
debt amounted to 145% of the GDP
• Overall NPL ratio was 1.4 trillion
yuan which was 1.75% of total bank
lending (2016)
IS BEIJING MANIPULATING THE
NUMBERS?
China’s total debt stood at 225% of its Gross Domestic Product, out of which corporate debt amounted to 145% of the GDP
• Some analyst believe that the actual ratio could be upwards
of 15%
• Reports of government pressure on banks:
• To move the NPL off its balance sheet
• To lower their loan-loss provision for smoother earning
trends in near future
• Still the Chinese government continues to encourage debt-
fuelled fiscal stimulus at the expense of banking sector
stability
8. MEASURES TAKEN BY
THE GOVERNMENT
CAPACITY REDUCTION
China’s total debt stood at 225% of its Gross Domestic Product, out of which corporate
debt amounted to 145% of the GDP
•Targeted steel and coal
sectors
•10-15% reduction
•WHY: Reduction of Excess
Capacity
SOE REFORMS
ANNOUNCED
China’s total debt stood at 225% of its Gross Domestic Product, out of which corporate
debt amounted to 145% of the GDP
•Mixed-ownership reforms
•Increase professional
management
•WHY: Broaden ownership and
improve efficiency
IDENTIFICATION OF
‘ZOMBIE’ COMPANIES
China’s total debt stood at 225% of its Gross Domestic Product, out of which corporate
debt amounted to 145% of the GDP
• •345 companies identified
• •Companies that have run
consecutive losses for 3
years
• •Plan to resolve them in 3
years
9. ISSUES WITH MEASURES TAKEN
BY THE GOVERNMENT
Does not spread
to other
industries.
Selective optional
restructuring
Uneven
implementation of
SOE reform and
no clear outcome
of reforms
No
comprehensive
and proactive
approach to
improve financial
discipline
Corporate debt
cases handled on
a case-by-case
basis
Existing systems
are not efficient in
identification and
weeding out
these companies
Merely a band-
aid, not a long-
term solution for
resolving debt
crisis
10. SUPPORTIVE
MEASURES
Facilitating Market Entry
•Factors Affecting Insolvency
•Disincentives for debtors
•Hurdles for creditors
•Reluctant courts
•Solutions non aligned with law
•Weak institutional capacity
Enhancing Legal Framework
Fiscal Discipline for
local governments
•Remedies
•Further legal changes
•Institutional reforms
•Connect Judiciary and out
of court debt restructuring
Enhancing Legal Framework Overall cost of restructuring
•8 million displaced workers
•2.8 mil from overcapacity
•5 mil from labour intensive
•Direct output loss of 1.9% of
GDP
•Overall output loss of 2.5%
•Policy to alleviate social
concerns
Easing the transition
11. • Strict disclosure standards for better compliance and
reporting
• Debt levels of SEO’s were reduced using strategies like:
M&A, Bankruptcies, Debt-to-Equity Swaps, Debt
Securitisation
01. Strengthening of banks & reducing the debt levels of
SOE’s
• In a debt to equity swap, debt is exchanged for a
predetermined amount of equity in the firm
• Led to freeing up of cash for fresh lending for investment in
a new wave of infrastructure products and factory upgrades
02. Debt Equity Swaps
• Financial institutions allowed tax deductions on the
provisions for NPA’s (India also adopted this practice)
• Dealing with debtors: Unlike India, defaulters are
restricted from travelling, applying for loans, getting
credit cards or being promoted
03.Incentives like tax breaks, exemption from
administrative fees
• In 2016, six pilot banks issued a combined 15.6 billion
yuan for non performing loans asset backed security
products in 2016
• The four big asset management companies bought the
NPA’s of national financial institutes
04. Creation of AMC’s, equity participation and Asset
based securitization
LESSONS INDIA CAN TAKE FROM CH
12. RECOMMENDATIONS
CLARIFYING STATE ROLE
•Across the
board
approach
more prone to
moral hazard
than market
vase
restructuring
•Market based
approach
more
susceptible to
coordination
failure
•Dominant role
of the state in
China creates
additional
distortions
•The state has
to be
proactive, but
also allow
market forces
to operate
13. RECOMMENDATIONS
TRIAGE: Firms facing difficulties servicing
their debts should be triaged into the viable
, which should be restructured and
nonviable, which should be liquidated.
•Triage is
difficult in
China
•Who should
do it? •How to start? •Next step
•Transparency
and access
to information
14. RECOMMENDATIONS
LOSS RECOGNITION: Regulatory and
supervisory oversight should force financial
institutions to proactively recognize and manage
impaired assets
•Banks: Loan
classification,
provisioning, bank
capital, etc.
•Shadow banking
activity: transferring off
book activities to bank
balance sheets
•Debt restructuring: Debt-
equity conversions, NPL
securitization, sales to
AMCs.
