NPL ratio remains low but is set to climb

Rising non-performing loans (NPLs) at Chinese banks have been making headlines recently. So far the increase has not been much to get excited about. Official data suggest the NPL ratio has barely moved from a very low 1% and even if the true figure is, as we suspect, much higher, the banking system remains healthier than a decade ago. However, we expect the NPL ratio to start climbing over the next couple of years, as tighter credit conditions and slower economic growth expose bad lending decisions made during the period of loose credit that followed the financial crisis. That said, we do not expect an increase in NPLs to precipitate a full-blown financial crisis, not least because the central government has the resources to support the banking sector if required.