This time, I'd like to talk about Chinese banks. In China, it's widely acknowledged that the real estate sector is in serious trouble. The reason for this is that real estate companies have taken on a significant amount of debt and are struggling to repay it.
There is concern that some major real estate developers might face financial difficulties. If that happens, it's not just a problem for the real estate industry; it also affects the entities that have lent money to these developers. If the expected returns on these loans don't materialize, it poses a risk to those lending institutions. Given this situation, specific developments related to Chinese banks have emerged, and I'd like to highlight one of these examples. There is a bank in China called Evergrande Bank, based in Guangzhou, which is a relatively large bank. On September 27th, they made a significant announcement regarding their assets.
They stated that they would sell assets worth 154.4 billion yuan, along with interest income of 29.3 billion yuan. In other words, they intend to sell off assets that consist of loans that the bank has extended to others. Banks lend money to various entities, and then they attempt to monetize their rights to receive the repayment of those loans, even if it means selling them at a discount. This is what Evergrande Bank is trying to do. These assets represent a principal amount of 154.4 billion yuan, and the interest income makes up an additional 29.3 billion yuan.
However, it appears that the bank is struggling to collect even the interest on these loans, indicating a high likelihood of these loans turning into non-performing assets. To handle this situation, the bank is initiating a process to deal with non-performing loans. However, there's a catch to this story. Chinese banks are required to provide financial reports, revealing the state of their assets. In their financial disclosures, Evergrande Bank reported total assets of 1.951 trillion yuan. These are not small numbers. However, their liabilities amount to 1.1228 trillion yuan. In these disclosures, they also provide information about non-performing loans, which, for Evergrande Bank, are reported at 19.6 billion yuan.
This seemingly contradicts the earlier information. Although the bank seems to have loans totaling 1.544 trillion yuan that have not been performing well and are unable to recover even the interest, on the books, they only classify 19.6 billion yuan as non-performing loans. In reality, the bank is carrying a significant number of loans that should be classified as non-performing but aren't. To address this issue, the bank is attempting non-performing loan resolution. They aim to remove these non-performing loans from their balance sheets, thus improving their financial situation.
The goal is to transform the loans with a face value of 154.4 billion yuan, which may have minimal realizable value, into something more manageable. The sale of these non-performing loans at a discounted rate of 176 billion yuan is a way to achieve this goal. The institution handling this transaction is the Guangdong Provincial Asset Management Company. They are a government entity with the backing of the provincial government, which adds an element of safety for the bank. While Evergrande Bank may be discounting these non-performing loans, the risk for this government-backed institution is still substantial.
If they are unable to recover these loans, it could result in significant losses. In such a scenario, the provincial government might need to step in to cover these losses, potentially leading to increased taxes or other financial measures affecting the general public. So, the real estate sector's problems in China are not confined to just real estate companies. The risks extend to financial institutions and ultimately impact the general public through potential government interventions. Furthermore, Chinese banks are inherently susceptible to creating non-performing loans due to their reliance on personal relationships rather than strictly following lending rules. This can result in lending to borrowers who may not have any intention of repaying, which can lead to an abundance of non-performing assets. This situation reminds us of a similar issue in China's past.
Even large banks in China, which are now internationally prominent, have dealt with non-performing loans by separating them from their balance sheets and managing the associated risks. Back then, China's economy was in a different stage of development, and these non-performing loans were ultimately resolved due to the rapid economic growth. However, the current economic outlook for China is not one of rapid expansion but rather potential contraction. In this context, resolving non-performing loans using the same methods might not be feasible, and someone may end up shouldering the losses. In summary, the real estate sector's challenges in China have far-reaching implications, affecting not only the financial sector but also local governments and the general population.
The risk of banks and financial institutions is closely tied to the real estate industry. Chinese banks are attempting to mitigate this risk by separating non-performing loans, but this is a complex issue given the economic conditions. The resolution of this problem will have significant consequences for China's economic future, and it's something to closely monitor.