IMF warns of corporate loan risks for Chinese commercial banks

An employee counts yuan banknotes at a bank in Huaibei, Anhui province.[Photo/Agencies]

The International Monetary Fund estimated some $1.3 trillion corporate loans potentially at risk on Chinese commercial banks' balance sheet at the end of 2015 in a new report released on Wednesday.

If 60 percent of these loans eventually go sour, commercial banks will incur a potential loss of up to $756 billion, accounting for 7 percent of China's GDP, the IMF said in the Global Financial Stability Report.

This prediction is based on the sample of 2,871 companies, including 2,607 listed firms and 264 unlisted firms. They borrowed $2,775 billion in total, of which $392 billion or 14.1 percent are considered debts at risk.

Despite the large number, the loss is manageable given China's bank and policy buffers and continued strong growth in the economy, said the IMF.

The loss is equivalent to 1.9 years of profits of commercial banks, judging from their 2015 pre-tax profits, it indicated in the report.

The report may overestimate unlisted companies' risks, as the method in categorizing non-performing loans used in the report is different from the prevailing international practice, Jin Zhongxia, IMF executive director for China, was quoted by 21 Century Business Herald as saying.

The rate of loss for loans potentially at risk may have been set overly high and the figures may involve regular loans, he said.

"The purpose of doing so is to take full account of possible losses; therefore, the estimates play a certain role of 'pressure test'", he explained.

Chinese commercial banks had some $400 billion of pre-tax profits and $356 billion of provision for non-performing loans in 2015, which is adequate to cover the loss in a relatively short span of time without impairing the capital base, he said.