Profit margins at Chinese banks will be squeezed next year and credit growth is likely to slow as increasing regulation eats up capital, Fitch Ratings said. The lending businesses of the country’s smaller banks face the most pressure and they will rely more on larger state-owned rivals for liquidity, the ratings company said in a statement Friday.
At the same time, the shadow-banking sector, which one brokerage values at about $19 trillion, will attract even more regulatory scrutiny in 2018, Fitch said, Bloomberg reported.
Chinese regulators are sweeping through the country’s $40 trillion financial sector in a bid to contain risk after total debt ballooned to about 260% of the size of the economy. In the past week alone, they’ve proposed rules governing returns from asset-management products, laid out limits on bank shareholdings and unveiled a purge of cash micro-lenders.
“Credit growth is likely to decelerate next year, given the tighter regulatory stance,” Fitch said. “Funding conditions are likely to remain tight, pointing to continued margin pressure at smaller banks which rely more on non-deposit funding.”
The predictions from Fitch and S&P Global Ratings on Thursday suggest the cost of the system-wide measures will be sluggish profit growth at domestic banks, which include Industrial & Commercial Bank of China Ltd., the world’s largest by assets.
New rules pushing shadow-banking items back on to lenders’ balance sheets will lead to an increase in risk that could weigh on bank capital, Fitch said. Net income growth in the banking sector will remain in the “low single digits” in 2018, it said.
The ratings company kept its outlook on Chinese banks at stable, saying sovereign support for the sector remains “very strong”.
Debt Pile
For years China's top officials have touted their ambitious policy priority to wean the world's second-largest economy off high levels of debt, but there is not much to show for it.
On the contrary, a Reuters analysis shows the debt pile at Chinese firms has been climbing in that time, with levels at the end of September growing at the fastest pace in four years.
The build-up has continued even as policymakers roll out a series of measures to end the explosive growth of debt, including persuading state firms and local governments to prune borrowing and tighter rules and monitoring of banks’ short-term borrowing.
By some estimates, China’s overall debt is now as much as three times the size of its economy.
China Total Debt for 2,146 companies: The analysis revealed that debt in the real estate sector multiplied the most over last five years, followed by industrials. The share of industrials in the total debt for the companies covered went up by 3 percentage points since the end of 2012, while that for the real estate sector went up by 7 percentage points.
China sector debt: As of September, state-owned enterprises, or SOE, reported a comparatively faster pace of growth in their debt. Total debt at 75 of the CSI Central SOE 100 index companies, which excludes financials, increased by more than 27% from a year ago, the biggest increase in many years.
China SOE debt service to revenue: A scrutiny of corporate debt showed that borrowing through the issue of bonds has fallen, however, possibly as the regulatory clampdown has pushed up financing costs. October’s data on aggregate social financing of corporate bonds, released by the central bank, showed aggregate financing of corporate bonds stood at 18.34 trillion yuan ($2.77 trillion) at the end of October after increasing 4.4% from a year ago, the lowest growth rate in two years.
China aggregate social financing of corporate bonds: The gap in funding needs appeared to have been filled by off-balance sheet financing in China’s murky and opaque shadow banking sector. Cumulative total social financing, which also includes shadow banking, stood at 172.2 trillion yuan at the end of October, though the exact size of shadow banking is unknown. Total social financing for the month of October 2017 was 1.04 trillion yuan.
While China’s government debt remains contained, at 46.9% of GDP as per latest figures from the Bank for International Settlements, top policymakers have recently raised concerns about a sharp build-up in household debt. Outstanding household consumer loans have surged close to 30% since the middle of last year and reached 30.2 trillion yuan as of October.
