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Opinion

Moral Hazard: China to look the other way on Bad Loans

Bloomberg: China to tolerate increase in bad loans, relax lending

China will tolerate an increase in bad debt this year as it eases rules governing bank lending to prop up an economy that’s slowing faster than expected, the nation’s banking regulator said.

The China Banking Regulatory Commission will drop its target of reducing the balance and ratio of bad loans after five years of declines, and instead aim to prevent a “massive and rapid rebound” in soured debts, Chairman Liu Mingkang said in Beijing today. A transcript of his speech was obtained by Bloomberg News.

Looser requirements may fuel concerns about a surge in bad loans, four years after China finished a cleanup of its banking system that cost more than $500 billion. Lenders will likely face weakening asset quality, rising defaults and “significant” constraints on profits in 2009, Standard & Poor’s said Jan. 7.

Of course there will be an increase in bad loans. Why will banks force a loan taker to pay if they can get away with it? (They’ll say “temporary”) And why will a person pay if they know a bank won’t care too much?

India’s going this way too. RBI has slowly started reducing provisioning for real estate loans (which are the biggest problem) and for other kinds of loans that actually need tightening, not loosening. But we’re loosening. Next stop: credit cards and personal loans. When regulations there loosen, the sh** will hit the fan.

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