Via Financial Times

In the three years since Guo Shuqing took the helm at China’s top banking regulator, he has won praise for an aggressive drive to tackle problems in the $40tn industry — in particular, his war on bad loans and excessive leverage.

But the fallout from the coronavirus outbreak that has throttled parts of China’s economy has delivered a savage blow to his reform programme. One consequence of the crisis — which has killed more than 1,500 people and squeezed China’s economy — will be to saddle the country’s banking system with hundreds of billions of dollars worth of new non-performing assets.

“[The virus epidemic] is disastrous for bad debt and will certainly cause Guo to lose a bit of clout,” said the head of a foreign lender in China, who has worked closely with the banking watchdog. 

Mr Guo, 63, is one of the Communist party’s most trusted technocrats. He is credited with bringing stability to China’s financial sector amid the ravages of President Xi Jinping’s eight-year anti-corruption campaign.

Within months of taking over in 2017, Mr Guo had unleashed a “regulatory windstorm” that targeted the opaque world of off-balance sheet lending, or shadow banking, that had expanded to a level that worried the authorities under his predecessor. 

Total shadow banking assets fell for the first time in a decade in 2019, a statistic often cited as a sign of Mr Guo’s success. The reforms broadened into a concerted drive to deleverage the economy, one of Mr Xi’s core policy initiatives.

“Guo Shuqing’s performance so far has been quite remarkable,” said Xie Yunliang, analyst at Minsheng Securities, who noted that the leverage in China’s financial sector had fallen more than 22 per cent between the time he took the job and October. Mr Guo was rewarded with the Communist party’s top job at the central bank, giving him super-regulator qualities over both banking rules and the flow of credit to the economy, an unparalleled position of power among financial regulators.

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But the virus that began in the Chinese city of Wuhan before it rippled through the global economy threatens to halt or reverse his progress.

The crisis has led to a formal quarantine of an estimated 55m people in central China, with no end date in sight. Factories across the country have been prevented from reopening and workers kept away from manufacturing centres. Standard Chartered has predicted China’s first-quarter economic growth could fall as low as 2.8 per cent.

This has placed huge pressure on the ability of millions of small and medium-sized Chinese companies to repay loans. In an about face on previous reforms, Mr Guo’s banking regulator this month called on lenders to raise their tolerance for bad debt, saying bad loans created during the crisis should not be counted as non-performing.

A security guard wearing a protective suit monitors passing office workers at a screening point at the Bank of China Tower in the Pudong district of Shanghai, on Monday, Feb. 10, 20202. Chinese-based manufacturers began to restart factories Monday, but no one knows for sure when they’ll be back at full-speed -- or what sort of chaos may ensue. Photographer: Qilai Shen/Bloomberg
A security guard in protective suit monitors passing office workers at a screening point in the Bank of China Tower, Shanghai © Qilai Shen/Bloomberg

Official government data say that China’s non-performing loans account for only 2 per cent of total loans but the real number is expected to be much higher. 

S&P has warned that the new approach could cause up to 11.5 per cent of total loans, or about $2.1tn, to become “questionable” — debt that is either non-performing or late. Such a load of debt could take years to work through, S&P said, and would eventually deplete the sector’s regulatory capital buffers, leaving some lenders vulnerable to liquidity shocks.

“Guo’s plans will need to wait,” said Alicia García-Herrero, chief economist for Asia Pacific at Natixis. She said some of the regulator’s methods for strengthening the sector, such as the issue of perpetual bonds, were little more than a “backdoor recapitalisation without public money”.

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Mr Guo has already proved his knack for stemming crises and financial contagion, even if some of the work has made him a divisive figure.

After China’s chief insurance regulator Xiang Junbo was detained in 2017, his portfolio was added to Mr Guo’s to form what is now the China Banking and Insurance Regulatory Commission. The bailout and restructuring of Anbang Insurance, which resulted in the arrest of its chairman Wu Xiaohui, was also carried out under his watch.

A bank controlled by Xiao Jianhua, a financial broker for a host of Chinese leaders before he was kidnapped from Hong Kong in 2017, was taken over by the government, the first such intervention in 20 years. 

Yet Mr Guo’s legacy could hinge on whether the steps he takes next are sufficient to counterbalance the economic impact of the virus.

The People’s Bank of China this month released about $300bn in new funds into the banking system and cut the benchmark lending rate. The banking regulator said that, as of February 14, lenders had made more than Rmb570bn in loans aimed at combating the effects of the outbreak on businesses.

If the funds reach struggling small and medium-sized companies, it could help keep important parts of the economy afloat, said Barry Naughton, a specialist on China’s economy at the University of California, San Diego. But if the financing only reaches bloated state-backed companies, they could also fail.

The top executive at another foreign bank in China likened the credit move to a medicine that Mr Guo had little choice but to prescribe. “If he doesn’t give the drug, the patient dies — so who cares about the side-effects.”

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Additional reporting by Sherry Fei Ju in Beijing