China's $3 Trillion of Hidden Bad Debt Prolongs the Pain

China's official non-performing loan ratio has barely moved from 1.5 percent for years, through a property collapse and the slowest nominal growth since the 1970s outside Covid. Most economists do not believe the number. Absolute Strategy Research in London puts the real bad-loan ratio closer to 10 percent, which on China's loan book works out to roughly $3 trillion of credit that should be classified as past due but is not. Other estimates run to twice that.

The Details

About 10 percent of listed non-financial firms in China have failed to cover their interest payments from operating earnings for three consecutive years, according to Absolute Strategy Research. A Dallas Fed study counted zombie firms at 16 percent of assets at non-financial companies in 2024, up from 5 percent in 2018. An anonymous government estimate cited by the EU Institute for Security Studies puts the true NPL ratio at 15 to 20 percent.

Beijing has chosen forbearance over recognition. Roughly 40 percent of loans are eligible for or already in some form of forbearance program, with banks discouraged from calling repayment or marking losses. A small-business leniency policy introduced during Covid covers 9.4 trillion yuan (S$1.8 trillion) of loans and runs into late next year. Regulators have told the big banks to keep reported NPL ratios under 2 percent. Banks collectively concealed more than 800 billion yuan of bad assets in the five years to 2024, based on Bloomberg calculations from National Audit Office reports. To shore up the system, officials have injected more than $100 billion of fresh capital into the six biggest banks.

Why this prolongs the slowdown, instead of ending it

The forbearance approach has kept China out of an open banking crisis, but the bill shows up in growth. As Victor Shih at UC San Diego put it, 'there's no financial crisis, but there's no free lunch in economics. The price is just growth, inefficiency and low productivity.' Capital that should fund healthy firms keeps recycling into zombies. Beijing cut its 2026 growth target to 4.5 to 5 percent, the least ambitious goal since 1991.

Hong Kong already shows what the next phase can look like. The city's distressed-loan ratio hit 2.01 percent at the end of 2025, the highest since 2004. Lenders including Bank of East Asia, UOB's HK branch, Bank of China and Hang Seng have built up their special-asset teams and are now pushing fire sales and liquidations of commercial real estate, including a HK$5.5 billion loan tied to the 25-floor HK NEO building in Kowloon. The mainland version of that cleanup has not started.

Sources: Business Times SG