May 08, 2006

Boy, and Just Think of the Late Fees

CHINESE BANKS have an appalling bad-loan debt load -- conservatively estimated at nearly $900 billion -- and more bad loans could be on the way when certain Chinese property markets cool off, according to the good folks at accountancy firm Ernst & Young. Interestingly, that's roughly the amount of foreign reserves that China has managed to accumulate.

The problem with non-performing loans is that they have a tendency to create insolvencies: not only among the badly-run companies that are hemorrhaging money, but also among the banks which had loaned out the cash. If the loans are simply kept as non-performing, there's at least hope -- no matter how academic -- that things will get back up to speed eventually. Still, the Chinese finance technocrats must be sweating bullets, for this is a problem that has continued to get worse.

It will be interesting to see if and how this situation affects the U.S. Department of the Treasury's delayed report on whether China is unfairly manipulating its currency.

Posted by Benjamin Kepple at May 8, 2006 08:46 PM | TrackBack
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