China's NPL Issue And The Warnng From PM Wen

On this morning's Business Times:

• Economists: China may face massive bank bailouts
  
  Published: 2010/03/15
  
  BEIJING: China may be forced to bail out banks that made loans for local-government projects under the unprecedented stimulus programme unleashed in 2008, according to Citigroup Inc and Northwestern University's Victor Shih.
  
  In a "worst-case scenario," the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan or US$350 billion (US$1 = RM3.30) by 2011, Shen Minggao, Citigroup's Hong Kong-based chief economist for greater China, said yesterday.
  
  "The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector," said Shih, a professor who spent months researching borrowing by about 8,000 local government entities.
  
  Chinese officials pledged this week to limit the risks posed by the investment vehicles, which circumvent restrictions on local-government borrowing to channel money into stimulus projects.
  
  Yan Qingmin, head of the banking regulator's Shanghai branch, said March 5 that China plans to nullify guarantees provided by local governments for some loans.
  
  Citigroup's Shen said officials may keep monetary policy loose for longer than they should, boosting asset prices and building up overcapacity, to avoid the "squeeze" on investment vehicles that would trigger bad loans and bailouts.
  
  "The risk is that inflation or asset bubbles force the government to withdraw their support to local governments much earlier than expected," he said in an interview.
  
  In Shen's worst case, commercial banks, lending because of explicit or implicit government guarantees rather than the quality of projects, see 20 per cent of lending to the investment vehicles turn bad in 2011.
  
  Chinese banks had 497 billion yuan of non-performing loans as of December 31, accounting for 1.58 per cent of advances, according to the banking regulator. - Bloomberg

For me, the non-performing loan issue is not unexpected. It's pound to happen after the reckless money printing ( See China PM Wen: The True World Champion Of Money Printing! and China Bank Loan Surges Is A Risk!). Not forgetting the countless warnings ( See Yet Another Warning On China From Andy Xie , The China Accident Waiting To Happen To Every One Of Us )

But what I do not like is "China plans to nullify guarantees provided by local governments for some loans".

How can they do things like this?

Nullify guarantees?

Well, what good is a guarantee then?

Anyway, wanderer, highlighted the following article (Many thanks! :D), in which Premier Wen stated "many Chinese companies are being kept afloat by emergency stimulus measures".

From ABC News: China warns of double-dip recession

• China warns of double-dip recession
  By China correspondent Stephen McDonell
  
  Updated Sun Mar 14, 2010 8:44pm AEDT
  
  China's premier Wen Jiabao says the world could still fall into a double-dip recession and is warning against complacency.
  
  At his annual press conference, China's number two leader has warned that the world has not yet escaped the clutches of the global financial crisis.
  
  Mr Wen said some of the major problems which caused the crisis have not been fully resolved.
  
  He said there is still a possibility of a double-dip global recession and many Chinese companies are being kept afloat by emergency stimulus measures.
  
  Given the possible danger ahead, Mr Wen indicated China was not ready to allow its currency to appreciate.
  
  He told the two-hour news conference that calls from the world's big economies for China to lift the value of its currency were unhelpful and protectionist.
  
  "The road ahead is not smooth and may be full of twists and turns," he said.
  The United States, the European Union and others have long criticised China's yuan regime.
  
  US lawmakers say the currency is undervalued by as much as 40 per cent, giving Chinese goods an unfair advantage in international trade.
  
  Climate defiance
  
  Meanwhile, Mr Wen says his country is not to blame for the collapse of climate talks in Copenhagen.
  
  "Some say China has become more arrogant and tough, and some have put forward the so-called theory of China's triumphalism," he said.
  
  In particular, he said China was not responsible for nobbling the climate talks.
  
  He has been criticised for missing a key meeting there but he says he was not invited.
  
  Mr Wen says his country is doing a lot to combat global warming, then, as if on cue, it started snowing outside the Great Hall of the People in Beijing.

Hmmm.... first Chinese non performing loans could soar... US350 billion is no small change ... and then Premier Wen admission that Chinese companies kept afloat by emergencies measures....

Cause of concern?

Just how bad is this issue? How badly managed are these companies? Did they over borrowed? Or did their business economics collapsed?