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Asia’s credit binge is starting to put some financial systems under strain, with global regulators warning that upward pressure on interest rates could lift household debt and lead to a further deterioration in banks’ asset values.
The World Bank said in its October economic update that China, Malaysia, India, South Korea, Vietnam, Thailand, Cambodia and Turkey were among the countries at risk, although the extent of market stresses varies considerably.
Other reports by the International Monetary Fund and Bank of International Settlements have called for loan conditions to be tightened, while admitting that this could curb business expansion, especially by smaller enterprises.
Lending to the private sector surged during the first half of the year in Thailand, Malaysia and Vietnam; credit growth has cooled in China and Cambodia, but their outstanding debt stock is still above desirable levels.
Personal loans rose by 15.7% in India in August, the most recent available data, even as lending to business stagnated and economic growth faltered. India’s economy grew by 5.7% in April-June, the slowest for three years.
In South Korea, household borrowings rose 10.4% to $1.23 trillion in the second quarter over the same period in 2016. This figure includes home loans.
Credit has been growing by almost 20% in nominal terms in Vietnam since the second half of 2015, well above GDP growth, prompting concerns by the World Bank over the productivity of new loans and the mispricing of risk.
China’s gross debt exceeds 236% of GDP
Household debt exceeded 80% of GDP in Malaysia, Thailand and South Korea at the end of 2016, levels regarded as unsustainable. China’s debt is a more manageable 44% of GDP, but has risen from 11% of GDP in 2006.
Lending to non-financial corporations comprised 165% of GDP in China in 2016, 100% in South Korea and 67% in Turkey. Gross debt-to-GDP reached 220% in China, 190% in South Korea, 80% in Turkey and 65% in India. China’s gross debt is still rising, exceeding 236% of GDP in July this year.
South Korea has been able to absorb the excess credit for more than six years without provoking a financial crisis, and China is eight years into its cycle. But the conditions that feathered this demand could soon change.
Interest rates are expected to rise as global growth picks up in 2018, hiking funding costs and triggering a likely wave of loan defaults. If they don’t tighten, some countries will risk a destabilizing outflow of capital that could undermine financial systems and lead to wider economic problems.
NPLs top $146 bn in India, $241 bn in Vietnam
Bad loans reportedly hit a record $146 billion in India at the end of June, up 4.5% from 2016 levels. Vietnam’s non-performing loans were officially $241 billion in 2016, but the real figure is probably far higher. The State Bank of Vietnam jolted markets in April when it disclosed that 8.86% of credit could be bad.
NPLs elsewhere are mostly around 2-3% of outstanding loans, and fairly static, though they are continuing to rise in Thailand, China and Cambodia.
The World Bank is pushing for monetary tightening while conditions are still manageable, but the trend has actually been in the opposite direction. Emboldened by low inflation, Vietnam, South Korea, China, Thailand and Malaysia have reduced their benchmark interest rates in recent months.
One reason they are holding off is that any slowing of credit expansion would almost certainly dampen private demand, which has become the key growth driver in most economies amid inconsistent export earnings.
Private consumption is expected to grow by about 7.9% this year in China – the same as in 2016 – 7.5% in Vietnam (7.4% in 2016), 6.6% in Malaysia (6.1%), 4.3% in Cambodia (6.7%) and just 3.1% in struggling Thailand (3.1%).
Big economies beginning to tighten lending
Nonetheless, Asia’s bigger economies have started turning the screws.
China has issued a series of policy directives aimed at cooling real estate markets – a prime source of problem loans – and reducing bank risk. Since late 2016 it has strengthened financial supervision and monetary rules.
India has insisted that banks set aside higher provisions against bad debts, expected to amount to $65 billion of additional capital by March 2019, which will erode their profits and reduce overall lending volumes.
South Korea announced on October 24 that it would tighten mortgage rules for owners of multiple homes from 2018, including tighter assessment of applicants’ eligibility for loans. It is likely to lift interest rates in November.
One chink in regulators’ armour is that they have little control over lending by the informal financial sector, which is now so big that it is become a significant source of business funding, especially for smaller corporations.
Shadow banking risk in China, other states
The IMF estimated in 2014 that “shadow banking” constituted 35% of GDP in China. Other assessments, based on different definitions of the range of activities covered by the industry, ranged as high as 81% of GDP (2013).
Non-bank lenders are believed to account for 25% of credit in Malaysia and Thailand and 13% in India, though a demonetization drive aimed at sucking out black market transactions has probably reduced demand in India.
Much of this lending is doled out by non-financial entities such as the investment units of trust companies, insurance brokers, securities and fund management companies and even humble pawn shops on street corners. They are generally cheaper – and decidedly more risky – than normal banks.
Worryingly, banks are themselves making use of the backdoor trading bonanza to move lending activities off their balance sheets and escape the scrutiny of regulators. There is a similar trend in Thailand and Malaysia.
The World Bank has been quick to remind regulators that the 2008 global financial crisis was sparked by the unscrupulous transactions of shadow banks in more advanced countries. They weren’t being monitored either.