China’s top four banks are preparing to report profits and investors will be looking at the quality of their loans much more than at the earnings numbers. Investors are waiting for China’s banks to give them transparency by recognizing their non-performing loans.
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Chinese banks historically either underreport their non-performing loans or fail to categorize them as such. Sell-offs in stock values of Chinese banks have increased their appeal to investors but investors are hesitant to buy—even at low prices—because they don’t know the extent of the banks’ bad debt.
The Chinese government pressured the banks in recent years to lend money to local governments to boost growth through infrastructure improvements. If the government eases further, it will result in more lending to already indebted institutions.
Loans to exporters are an additional concern since the global economy is soft as a result of Europe’s sovereign debt issues and the slowness of the US recovery.
Bad loans increased 4% from the previous quarter. It was the third quarter in a row in which the quality of loans decreased. China’s ratio of non-performing loans
to good loans has increased over the past year and could be an indication of how smaller banks with exposure to foreign economies are doing.