World Economy

China’s toxic debt pile may be 10 times official estimates: Fitch

China's $2.1 trillion black hole?
China's $2.1 trillion black hole?

Toxic loans in the Chinese financial system could be 10 times as high as official estimates suggest, Fitch Ratings has warned.

The international ratings agency said in a report on Thursday that, as a proportion of China's total loan pool, non-performing loans (NPLs) could be as high as 15-21 percent. By comparison, official data put the NPL ratio for commercial banks at 1.8 percent at the end of June 2016.

"There seems a high likelihood that banks' NPL ratios will continue rising over the medium term, in light of this discrepancy. There are already signs of stress, most obviously in the increased frequency with which banks are writing off or offloading loans, such as those to asset-management companies," the report said.

Solving China's bad loan problem would result in a capital shortfall of 7.4 trillion-13.6 trillion yuan ($1.1-2.1 trillion), equivalent to around 11-20 percent of China's economy, Fitch said.

Pedestrians walk past Chinese national flags displayed along Nanjing Road in Shanghai, China.
Qilai Shen | Bloomberg | Getty Images

It warned that the capital gap could rise by another 10-13 percentage points by the end of 2018 "if inefficient credit continues to rise at the same rate as recent years and no additional internal or external capital is raised."

Fitch said the Chinese state would likely have to help solve the corporate debt situation – but that this could put pressure on its credit rating. It currently rates China at A+ with a stable outlook.

"An upfront resolution of problem credit and recapitalization of the financial system is not Fitch's base case, but it is one scenario that could lead to an unexpected increase in general government debt," the report said.

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