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Leland Miller: The Crisis Ahead for China’s Policy Banks

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Leland Miller: The Crisis Ahead for China’s Policy Banks

With these robust numbers, China’s policy banks are either the best-run banks in the world, unusually lucky, or else their financials utterly fail to reflect the banks’ underlying exposure. After all, how is it possible for policy banks to loan hundreds of billions of dollars to some of the world’s riskiest borrowers and yet regularly announce double-digit earnings growth and sterling NPL ratios often less than 1 percent?

The simple answer, of course, is that the massive expansion of total lending contributed significantly to the reduction in NPL ratios, at least in the short term, simply by increasing the denominators. “Flexible” Chinese accounting principles have also played a role. But a more fundamental issue is also at play: So long as Beijing insists on treating policy banks as sovereign lending arms that operate outside the traditional banking system, a categorization no longer justifiable or even in China’s self-interest, investors will have an incomplete picture of the true health of the banking system-which, with over $100 trillion in assets, now represents the largest in world history.

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