CHINA’S bad loan problems are “not as serious as” Hayman Capital Management’s Kyle Bass claimed earlier this month, according to China International Capital Corp., the investment bank Morgan Stanley helped create in 1995.

    While the nation’s reported bad loan ratios may not reflect the actual risk level lenders will face in the future, 10 trillion yuan (US$1.5 trillion) is the most that banks could lose from soured credit in an economic hard-landing scenario, CICC analysts led by Mao Junhua wrote in a note Sunday.

    That’s less than half the US$3.5 trillion potential loss flaggedby Bass, the hedge fund manager who successfully bet against mortgages during the subprime crisis. Bass’s estimate was based on the possibility of China’s banking system shedding 10 percent of its assets because of nonperforming loans, the investor wrote in a letter to investors obtained by Bloomberg.

    “Bass’s estimate could be too large” as it implies a true bad-loan ratio for China banks at 28 to 30 percent, Larry Hu, a Hong Kong-based China economist at Macquarie Securities Ltd., said in a research note yesterday.

    The official ratio reported by the China Banking Regulatory Commission was 1.59 percent as of Sept. 30, while the actual figure could be about 8.1 percent, the CICC analysts said.

    Meanwhile, investors have priced in a ratio of 14.1 percent for Chinese bank stocks traded in Hong Kong, based on current valuations, according to CICC. Those shares have lost an average 16 percent this year.

    The amount of bad debt piling up in China as its economy slows is at the center of a debate about whether the country will continue as a locomotive of global growth or sink into decades of stagnation like Japan after its credit bubble burst.

    Total credit exposure faced by Chinese banks, including loans and investments in corporate bonds, receivables investments, and credit exposure from wealth-management products, may reach 122 trillion yuan, the CICC analysts said. (SD-Agencies)