China’s banks have a bad-debt problem

Bank of Jiujiang, a mid-tier lender from a southern Chinese river town, imparted some bad news on March 19th. In a rare disclosure, it told investors profits for 2023 might fall by 30%, because of poorly performing loans. This is just the sort of information Chinese banks are normally reluctant to reveal. Indeed, they often go to great lengths to avoid doing so.

Typically, the subterfuge works as follows: the bank lends to an asset-management company (AMC) that in return purchases its toxic loans. The contracts drawn up between the two parties include stipulations that enable the AMC to avoid the credit risks of the bad loans they are buying. Confidentiality clauses keep these arrangements from being disclosed, sometimes even to courts.