The vanishing interest income of Chinese banks

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Title: The vanishing interest income of Chinese banks
Author: Kauko, Karlo
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 2/2020
Year of publication: 2020
Publication date: 5.2.2020
Pages: 25
Subject (yso): pankit; luotot; riskit
Keywords: Bofit-kokoelma; Kiina
JEL: G21; O53
Other keywords: non-performing loans; China; banks; impaired loans; NPLs
Abstract: Chinese banks likely have more non-performing loans (NPLs) than officially reported. As hidden NPLs earn no interest income, loan quality problems may erode the gross interest income of banks. Using stochastic frontier analysis, we estimate the interest income of a hypothetical profit-maximising Chinese bank with no credit quality problems. Taking the deviation of actual interest income from the calculated efficient income, we then attempt to reveal the amount of hidden NPLs in Chinese banks. Our results uncover a substantial weakening in the quality of Chinese bank loan portfolios in 2016. Big banks are found to have the largest reservoirs of hidden NPLs. Dependence on interbank funding also seems to be a determinant in the size of hidden NPL portfolios.
Table of contents: Abstract .. 4 1 Introduction .. 5 2 The data .. 7 3 Hypotheses .. 9 4 Constructing a hidden NPL indicator .. 11 4.1 Deriving the proxy indicator .. 11 4.2 Testing the proxy indicator .. 15 5 Determinants of hidden NPLs .. 18 6 Conclusions .. 21 References .. 23

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