Latest data on bank lending in China suggests default risk may have moderated


Long-term loans to Chinese companies and advances to small businesses have grown at the fastest rate in more than two years, indicating that Beijing’s years-long efforts to redirect liquidity to the real economy have started to bear fruit. their fruits.

Although Chinese bank profits are likely to remain under pressure in 2020, analysts believe data suggests the risk of bank loan default may be lower than it seemed at the start of the year. They say China’s economic recovery appears to be on more solid footing, as demand for credit is driven more by the manufacturing, infrastructure and private sectors, rather than real estate and investments in stocks and bonds as in. previous economic cycles.

As of June 30, the outstanding medium and long-term business loans had increased 13.4 percent from the previous year to 62.2 trillion yuan, according to data released by the People’s Bank of China on 31 June. July. growth rate since the first quarter of 2018, when these loans increased by 14% from the previous year.

The outstanding amount of so-called inclusive loans, in which individual credit lines do not exceed 10 million yuan each, increased 26.5 percent year-on-year to 13.5 trillion yuan at the end of June, according to the PBOC. It is also the strongest year-on-year growth since the central bank began releasing quarterly data on bank lending in early 2018.

“We believe that the quality of banks’ assets can be improved by improving the quality of China’s economic recovery, which is more [reliant] on industrial modernization and resilient consumption … that [on] the real estate industry, ”Bruce Pang, head of macro and strategic research at China Renaissance Securities, told S&P Global Market Intelligence.

Strong loan growth

At the end of June, the total outstanding loans in yuan with Chinese financial institutions had increased by 13.2% compared to the previous year to reach 16520 trillion yuan, a new record, according to the central bank. Outstanding loans to non-financial businesses and government departments and agencies increased 12.8% from the previous year, the second-highest pace since the start of 2019.

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In a bid to revive the economy which was first hit by global trade tensions and then by COVID-19, Beijing has pushed banks to lend more aggressively, especially to projects and small businesses that have profiles of weaker credit.

DBS Bank expects yuan lending to grow between 13.5% and 14% this year, while inclusive lending could keep pace with growth of 25% to 30%. “As banks are required to support the recovery of the Chinese economy and [the] PBOC continues to maintain abundant liquidity in the market, Chinese banks will distribute more loans in [the second half of 2020] through increased deposits and the injection of capital to support lending capacity, ”said Cindy Wang, Chinese banking analyst at DBS, in comments emailed to S&P Global Market Intelligence.

Since early 2018, the Chinese central bank has repeatedly reduced banks’ reserve requirement ratios and gradually lowered benchmark interest rates in order to reduce funding costs. The government has also allowed banks to postpone recognition of some of the non-performing loans under moratorium or restructuring, and launched state-sponsored credit guarantees for small and medium-sized enterprises to share loan risk with financial institutions.

Iris Pang, Greater China Economist at ING Bank, said banks in general will always be less willing to lend to small businesses and projects deemed too risky. At the same time, lending to infrastructure projects, which was one of the drivers of long-term business lending, is expected to continue growing in the second half of 2020, supporting the country’s economic recovery.

Difficult year for banks

China Renaissance’s Pang expects inclusive lending and lending to the manufacturing sector to likely continue to grow in the second half of 2020, although interest rates on these loans may fall further. The government has said that the banks should “cede 1.5 trillion yuan in profits to the real economy this year.”

Nomura said in a July 31 research report that 2020 will be a “difficult year” for Chinese banks as their profits begin to show pressure from increasing loan loss provisions as well as net interest margins. weaker. Dividend payments, especially among large public banks, could come under pressure this year.

For the country’s largest banks in terms of assets, their net interest margins are likely to fall by an average of 1.9 basis points for every 10 basis point drop in their lending interest rates, the house said. brokerage.

He also expects the net profits of Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Agricultural Bank of China Ltd. fall 1% in 2020 from the previous year, after increasing 4.9%, 4.7% and 4.6% in 2019, respectively.

As of August 4, US $ 1 is equivalent to Chinese yuan 6.97.

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