Chinese Banks and Non-Performing Loans (NPLs)

Interesting report out from Stratfor about Chinese banks and NPLs. I actually had a conversation with a banker friend of mine Thursday night about this exact subject. My comments to him were: "Wasn't Friedman the one who said the Japanese banks were headed for a collapse, with several bankrupties and merger/buyouts to follow in the late 90s and early 00s? I'm not syaing the Chinese banks aren't in trouble. They very well might be. Just be wary of the source."

I did read the report and the first thing I wanted was numbers. I wanted cold hard facts. It took Friedman a while but he got around to citing a report by Fitch, the bond rating agency. Here's what he said:

There are numerous ways to measure the magnitude of the problem, but one of the simplest is this. China is said to hold nearly $819 billion in foreign reserves. Fitch's conservative estimate of the bad loan situation comes close to matching that number, and a more liberal calculation would swallow those reserves up and then some. Put very simply, the Chinese banking system is in deep trouble -- and with it, so is the Chinese economy.

I honestly don't know enough about the banking industry--commercial banking that is--to gauge the validity of this point. Anyone? Regardless, it doesn't sound too positive.

Friedman then goes on to discuss measure the Chinese can take to remedy the situation but probably won't because of the corruption. The standard by which I judge corruption is Russian and Mexican corruption. Both are overt, clear and absolutely pervasive. By this measure China cannot be included with the aforementioned nations. Then again, there is massive corruption in America, but the price is far above what I am able to pay. So, perhaps there is a great deal of corruption in China as well. I cannot say. Will it cripple their government from making the right choices? It hasn't helped us much.

Finally, Friedman writes:

a turning point has been reached that will be difficult to ignore. Reports from Stratfor are, of course, one thing. Reports from a single credit agency are another. But when a series of reports from highly respected, mainstream analysts all come out within a few days of each other -- with each, in their own way, telling the same basic story, it becomes hard for the system to dismiss that. Western companies moving into China have CEOs and CFOs who must exercise due diligence. There are now too many reports out there to be simply ignored. All of them are caveated. None of them write China off. But a critical mass is forming that will cut through the froth in due course.

This is certainly true as far as perception is reality. Again, I cannot gauge if there is a real banking problem in China, although Stirling has alluded to something of that import, what I can do is agree with Friedman's comments. One report is nothing. Two is a coincidence, three, well that is a trend. And in my old business you ignored trends at your peril.