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IPFS News Link • China

China Central Bank Orders Lenders To "Tolerate" Higher Bad Debt Levels To Avoid Financial

•, by Tyler Durden

Last week we reminded readers that unless Beijing manages to contain the coronavirus epidemic, China faces a fate far worse than just reported its first ever 0% (or negative) GDP print in history. For those who missed it, here it is again: back in November, we reported that as part of a stress test conducted by China's central bank in the first half of 2019, 30 medium- and large-sized banks were tested; In the base-case scenario, assuming GDP growth dropped to 5.3% - nine out of 30 major banks failed and saw their capital adequacy ratio drop to 13.47% from 14.43%. In the worst-case scenario, assuming GDP growth dropped to 4.15%, some 2% below the latest official GDP print, more than half of China's banks, or 17 out of the 30 major banks failed the test. Needless to say, the implications for a Chinese financial system - whose size is roughly $41 trillion - having over $20 trillion in "problematic" bank assets, would be dire.

Well, with GDP set to print negative if Goldman is right (with risk clearly to the downside as China's economy remains completely paralyzed)...

... every single Chinese bank is set to fail a "hypothetical" stress test, and the immediate result is an exponential surge in bad debt. The result, as we discussed in detail last week, is that the bad loan ratio at the nation's 30 biggest banks would soar at least five-fold, and potentially far, far more, flooding the country with trillions in non-performing loans, and unleashing a tsunami of bank defaults.