Stimulus is once again proving costly for banks

The return on assets of Chinese banks fell to a record low last quarter after they heeded policymakers’ calls to step up lending and sacrifice profits in order to lower borrowing costs for struggling firms. This will help shore up economic activity in the near-term but it will add to the pile of bad debt that banks had already accumulated due to their role as counter-cyclical policy tool following the Global Financial Crisis. The impact of this on financial stability will depend in large part on the government’s willingness to repay the banks for this stimulus bill by injecting capital or transferring bad debt onto its own balance sheet.