Carson Block, the short seller who runs Muddy Waters LLC, said China’s bad-loan problem is more widespread than just local government debt and includes public and private sector borrowing.
Non-performing loan “figures greatly understate the potential scope of the problem of poor-quality loans,” Block said in an e-mail. “We believe that the PRC banking system will be hit hard by the unwind, and that the government will be forced to recapitalize a number of the banks.”
Chinese banks are grappling with rising defaults and slowing profit growth as regulators ease controls over loan pricing and deposits to spur competition. The country’s soured debt, which has risen for six straight quarters, in part prompted Block to bet against the bonds of Standard Chartered Plc, the U.K. bank that earns most of its profit in Asia.
Bad debt in China climbed to 526.5 billion yuan ($86 billion) in the three months through March, marking the longest deterioration streak in at least nine years, according to regulatory data released this month.
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