Chinese Banks Are Worse Off Than You Think

Rosy loan-to-deposit ratios hide a serious nonperforming-loan problem

By PATRICK CHOVANEC

Investors are worried about the health of China's banks. They're afraid—with good reason—that the massive, state-directed lending binge that was instrumental in pumping up China's GDP figures the past two and a half years will end up producing an equally massive pile of bad debt. Barely a week goes by without new word of a troubled project or impending default.

Never fear, say the banks and some analysts. They point to the extraordinarily low loan-to-deposit ratios of Chinese banks, averaging around 65%, as evidence that these banks have plenty of cash to cushion themselves against any future loan losses they might suffer. Everything is under control.

This argument is misleading, and offers a false sense of comfort.

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