HONG KONG (Reuters Breakingviews) - Chinese banks look healthy enough to handle more debt medicine. Stable real estate and solid corporate profits helped boost big lenders’ earnings and margins in 2017, while manic asset growth slowed and risk buffers thickened. That clears space for newly empowered regulators to force more defaults, and address flaws in China’s debt-for-equity swap programme.
Overall lending hit a record $2.1 trillion in 2017. But official data shows a welcome slowdown is underway. Asset growth began decelerating across the system starting last April, led by smaller commercial banks in cities, who binged on peddling shadow-banking products. The growth rate in their assets fell to 10 percent in February, compared to 24 percent the previous year. That’s good news.
Cheaper funding plus rising lending rates also boosted net interest margins for the larger institutions, offsetting shrinking fees from off-balance-sheet activities. Among the “Big Four” state-owned giants, Agricultural Bank of China posted a 4.9 percent annual earnings jump, followed closely by China Construction Bank at 4.7 percent. Industrial and Commercial Bank of China, the biggest and stodgiest of the four, eked out a 3 percent gain, but that was up 2.5 percentage points from 2016. Big banks also lifted provisions against non-performing loans to 180 percent of bad debts, up from 162 percent at the end of 2016.
For shareholders who have enjoyed a rally in bank shares over the last 12 months, the risk is the good news encourages reformist officials to be tougher with borrowers. Regulators might start by forcing defaults by debt-sodden local governments, and could shake up the troubled debt-to-equity swap scheme, which lets banks convert dodgy loans to state-owned enterprises into equity, then dump that onto insurers, asset managers and state investment funds.
That would sting the Big Four a bit; they are heavy lenders to SOEs. Smaller banks will remain stressed too, since they are more dependent on unconventional finance, and Chinese regulators are now working in unison to squeeze shadow banking. The economy might also be less supportive. Industrial profit growth is slowing, a trend that could be aggravated by trade tensions with the United States. Last year was easy for Chinese financiers. This one could be harder, but healthier.
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