Why China's government can write off $200B in bad loans

Chinese currency 100 Yuan notes are counted in Beijing.

TEXT OF STORY

Steve Chiotakis: Over the years, Chinese banks have made loans totaling more than a trillion dollars to local governments throughout that country. Now, however, there's a problem. A central government audit shows 20 percent of that money may never be paid back. To give you an idea of how big a deal that is: If the same number of loans were bad here in the U.S., it would spur another economic crisis. But China's a little different, as Marketplace's Shanghai Bureau Chief Rob Schmitz reports.


Rob Schmitz: So how do Chinese banks have the money to write off all these bad loans? The truth is they really weren't loans in the first place.

Arthur Kroeber: What it really is, is disguised government spending.

Arthur Kroeber is an economist with Dragonomics, a research consultancy in Beijing. Banks here lent a record $1.4 trillion last year. And he says that when a local government can't pay back its debt, the central government will step in and take over the repayment. Even the fact that the bad loans will total more than $200 billion isn't much of a surprise, but it is important.

Kroeber: So clearly, the profits of banks are going to go down, they're going to come under a little bit of capital pressure, their stock prices will fall, and they will have a little less ability to lend you money, because they're sitting on these losses.

And strangely enough, that's exactly what China's government wants. It's been clamping down on lending to slow the country's growth. This should help it a little. How's that for a planned economy?

In Shanghai, I'm Rob Schmitz, for Marketplace.

About the author

Rob Schmitz is Marketplace’s China correspondent in Shanghai.

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