It is now quite well-known now that non-performing loans in China are surging, and loans at risk of turning non-performing are also on the rise. But we are always suspicious on these figures as they look artificially low. And here is why.
The Chinese banking sector is dominated by state-owned banks, and as we said in our guide to Chinese monetary policy, the most powerful tool in People's Bank of China toolbox in stimulating credit is not interest rates, nor reserve requirement ratio, but state directed lending, or in some other literature: window guidance. The state may have a defined target of new loans, and may even have specific sectors that they wish the lending to be directed to. In turn, banks will lend because they are told/persuaded/forced to.
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