China is testing a program that allows banks with bad loans to sell that debt to investors, The New York Times reported Saturday.
Zhou Xiaochuan, the governor of the People’s Bank of China, and Pan Gongsheng, a deputy central bank governor, said that under the proposal the bad debt would be sold to institutional investors, rather than have banks hold the bad debt to free up capital for new business. Some experts are skeptical, saying this could help banks to temporarily shore up their balance sheets but could cause greater difficulties in the long run.
Zhou and Pan vow to take measures, monitored closely by regulators, to ensure that these efforts keep from creating the factors that were largely responsible for the global financial crises of 2008. The pilot includes a small numbers of major financial institutions and excludes mom-and-pop investors. Economists say many Chinese banks, in a practice known as "extend and pretend," fail to force companies to pay back loans or restructure, raising concerns that its biggest banks may hold a substantial number of bad loans.
Meanwhile, China’s total debt stands at 2.5 years’ economic output, much of it corporate debt, as the country’s economic performance has hit its slowest rate in 25 years.