China bad debt spikes by more than a third

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Chinese banks face a spike in bad loans amid slowing economic growth, PwC warns in a new report.

"There are a variety of indications that credit risk exposure is accelerating," said PwC China Banking and Capital Markets leader Jimmy Leung in a press release published on Thursday.

Asset quality continues to worsen, while the average overdue loan period is constantly increasing, Leung said, noting there is growing pressure on overdue loans to be downgraded to the non-performing loan category.

Slowing economy

Slowing growth in the world's second largest economy prompted the People's Bank of China (PBoC) to stimulate lending, but that has seen the quality of loans deteriorate.

China's economy expanded at its slowest full-year pace in 24 years in 2014, undershooting the government's target for the first time since 1998. The economy continued to lose momentum in the first quarter of 2015 with on-year growth marking its slowest pace in six years.

The PBoC has undertaken easing measures to prevent the economy from slowing further. Most recently, the central bank cut the reserve requirement ratio (RRR) for banks by 100 basis points on April 19 to stimulate lending – the second RRR cut in as many months.

More bad loans

As the economy slows, the loan books at China's 12 biggest listed banks are growing, but the quality of their loans appears to be deteriorating.

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Banks' combined loan balance grew 11.49 percent on-year in 2014 to 52.31 trillion yuan ($8.44 trillion), according to PwC.

But NPL, or bad loans, rose at a much higher rate of 38.23 percent to 641.5 billion yuan, the report said. Loans that could turn bad increased at an even faster pace; overdue, but not NPL loans, jumped 112.65 percent on-year.

"The banks need to get to grips with credit asset quality pressures," said PwC's Leung.

At the same time, interest rate liberalization, the introduction of deposit insurance and the stock market rally "will affect the stability of [banks'] liabilities," he said.

New opportunities

But reforms should present new business opportunities, particularly for the commercial banks.

"There is no turning back now. In the medium to long term, the country's 'One Belt and One Road' strategy will boost trade activity, mergers and acquisitions and financing needs. These will become the new opportunities for commercial banks," Leung said.

"[The] Chinese banking industry will face more opportunities than challenges under the 'New Normal'."