wisepowder: China Financial System Leverage Set to Stabilise in 2021

China Financial System Leverage Set to Stabilise in 2021

14 Apr 2021 at 23:12

China Financial System Leverage Set to Stabilise in 2021


Fitch Ratings-Shanghai/Hong Kong-01 June 2020: Leverage in China’s financial system will hit a new record in 2020 given the sharp slowdown in nominal GDP growth caused by the coronavirus pandemic, but the rise in leverage should be temporary, says Fitch Ratings. The government's continued emphasis on containing financial-sector risks and its efforts to boost capitalisation in more vulnerable banks are positive signs, but challenges associated with transparency may become more pressing in 2020.To get more finance news China, you can visit shine news official website.

Fitch views bank capital as a significant constraint against aggressive bank-led stimulus. Our analysis shows that the ratio of outstanding Fitch-adjusted total social financing (FATSF) to GDP will jump 18pp to a new high of 273% in 2020. The FATSF figure excludes central government bonds and local government bonds, which have been included in the official TSF data since December 2019, and local-government special bonds, which have been included in the TSF data since September 2018.
The rise the FATSF-to-GDP ratio in 2020 will be largely driven by Fitch’s forecast of a sharp slowdown in nominal economic growth, while we expect a slight acceleration of loan growth as banks adhere to the policy approach outlined by the government at the annual session of China’s National People’s Congress (NPC). Fitch’s forecasts for nominal GDP growth appear lower than the government’s, which can be inferred from the NPC budget targets, although there is no official GDP growth target this year. However, we expect the upward trend in leverage to be short-lived as economic recovery in 2021 should see overall system leverage maintained at a stable level in 2021.

We expect loan growth in 2020 to be dominated by corporate and inclusive finance loans, with consumer spending (and credit) being badly affected by the impact of the coronavirus on confidence and incomes. The government’s call for large state banks to increase lending to inclusive micro and small enterprises (MSEs) by a 40% in 2020, following around 50% growth in 2019, could pose more risks to asset quality. However, inclusive MSEs accounted for only around 8% of system loans at end-1Q20. The government is also looking to promote lending to “new infrastructure”, such as 5G networks, as well as loans to traditional public works and urbanisation initiatives.
Pressure on all banks' profitability will increase in 2020, and Chinese banks are no exception. Lower interest rates will dampen earnings, as will the weakness in credit card and personal lending, an important driver of fees and profits for mid-tier banks in China in the past several years. Earnings challenges will be particularly notable for smaller institutions as their weaker franchises could result in greater net interest margin compression. Smaller institutions also tend to have weaker asset quality and capitalisation.

The People’s Bank of China, recognising this risk, announced 11 financial reform measures on 27 May focused on small and medium-sized banks, which, among other goals, sought to accelerate the replenishment of their capital. The China Banking and Insurance Regulatory Commission also moved to give insurers more flexibility to invest in perpetual bonds and Tier 2 capital instruments issued by banks.

At the NPC, the government again emphasised the need to contain financial risks. We expect the contraction in shadow financing, such as entrusted loans and trust loans, to continue in 2020. However, wide-ranging loan forbearance and increased lending to state-owned corporates are likely to reduce transparency and further complicate the recognition of asset quality problems. We expect official efforts to rein in system leverage to strengthen in 2021, assisted by stronger economic growth, but if leverage continues to increase significantly, this could affect our assessment of the operating environment risks for China's banks.



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