Chinese Banks Need a Pre-emptive Bailout

From the WSJ:

Beijing can tackle tough reforms now, or wait until problems grow more severe.

China's banks are much unloved these days. The government is pressing them to maintain small-business lending even as Beijing scales back broader credit creation to fight inflation. Analysts fret about the growing risks of nonperforming loans. Last week, an arm of the sovereign wealth fund Central Huijin had to buy bank shares in an effort to arrest a sell-off that has seen share prices fall some 30% this year.

China is not suffering a banking crisis now, but there's growing cause for concern. The only way to avert more serious problems is a new wave of reform.

What ails China's banks? First, China's growth has slowed, thanks largely to tight monetary policy since the beginning of 2011. This inevitably will push some of the banks' borrowers into difficulties.

Second, China's real-estate industry is in the midst of a cyclical correction. This is a victory for the government's anti-speculation efforts, but not a cost-free one. After 18 months of various regulatory controls, developers' sales volumes have become weak and their finances are tight. Inventories of unsold apartments are accumulating. Apartment prices will have to come down. Some small developers will go under.

Finally, some 20% of outstanding bank loans are to entities established by local governments to fund infrastructure projects. This—alongside all that inflation–is one of the legacies of China's 2009-10 stimulus package. These local-government funding vehicles leveraged up on bank credit, and built new metro systems, roads and airports. But it's unlikely all these projects are going to be able to repay those loans.

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