Just as it looked like Beijing was starting to get a handle on its regional banking crisis, a much more severe threat is engulfing the world’s largest banking system as a deadly new virus hits the country’s economy.

The impact of the spreading coronavirus risks bringing to life the worst-case economic scenarios contained in China’s annual banking stress tests. Last year’s exercise envisaged annual economic growth slowing to as low as 4.15 per cent – a scenario which showed that the bad loan ratio at the nation’s 30 biggest banks would rise five-fold. Analysts now say that the outbreak could send first-quarter growth to as little as 3.8 per cent.

Banks are already suffering record loan defaults as the economy last year expanded at the slowest pace in three decades. The slump tore through the nation’s $41-trillion banking system, forcing the first bank seizure in two decades and bailouts of two other key lenders.

“The banking industry is taking a big hit,” said You Chun, a Shanghai-based analyst at National Institution for Finance and Development. “The outbreak has already damaged China’s most vibrant small businesses and if it prolongs, many firms will go under and be unable to repay their loans.”

Trade dispute with the US

The virus outbreak comes on top of an unresolved trade dispute with the US. With many banks under-capitalised, it may put even the nation’s heavyweight lenders, often called on to support growth, at danger from the growing stress.

Economic growth is seen plummeting this quarter, even amid heavy cash injections from the central bank. Whether that stagnation will carry through to the rest of the yeardepends on how quickly authorities can get a handle on the spreading virus and get its economic engines running again.

UBS Group estimates growth will slow to 3.8 per cent in the first quarter from a 6 per cent pace at the end of year and to 5.4 per cent for 2020 if the virus is contained within three months.

“If the virus is more protracted, annual growth could dip below 5 per cent,” said UBS. Goldman Sachs Group also predicts a sharp slowdown in the quarter to 4 per cent, while still predicting full-year growth at 5.5 per cent.

Doing its own calculations based on China’s stress tests, debt rating firm S&P Global estimates that the worst-case scenario would cause bad debt to balloon by 5.6 trillion yuan ($800 billion), for a ratio of about 6.3 per cent, adding to the already daunting 2.4 trillion yuan of non-performing loans China’s banks are sitting on.

Banks with operations concentrated in Hubei province and its capital city of Wuhan, the epicenter and the region worst hit by the virus, will likely see the greatest increase in problem loans.

The region had 4.6 trillion yuan of outstanding loans doled out by 160 local and foreign banks at the end of 2018, with more than half in Wuhan. The five big state banks had 2.6 trillion yuan of exposure in the region, followed by 78 local rural lenders, according to official data.

Another bailout

Moreover, policy makers have once again enlisted its largest lenders, including Industrial and Commercial Bank of China, to serve their civic duty by bailing out millions of struggling small businesses by providing more cheap loans, rolling over debt and waiving fees.

Officials sought to ease concern over the hit to the banking sector. Zhou Liang, Vice-Chairman of the China Banking and Insurance Regulatory Commission, said that a potential increase in bad loans is manageable. Chinese lenders dissolved 3 trillion yuan of bad loans last year alone, he said, adding that bad loan ratio of China’s small businesses was at 3.22 per cent.

Highlighting the plight of small bushiness, a recent nationwide survey show about 30 per cent said they expect to see revenue plunge more than 50 per cent this year because of the virus.

Eighty five per cent said they are unable to maintain operations for more than three months with the cash currently available.

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