China’s small lenders bear brunt of risks in banking sector

INTERNATIONAL DESK: China’s small lenders will bear much of the risk in China’s banking industry, as an economic slowdown caused by the country’s zero-Covid policy exacerbates their weaker fundamentals, according to credit rating agencies Moody’s and CCXI.

“Medium-sized and small banks will be impacted by regional economic fluctuations and the pandemic, and in the future they will face more pressure to control their bad loan ratios and provision coverage ratios,” said Wen Yuqi, director of the financial institutions ratings department at CCXI, referring to the amount of capital they must set aside to cover soured loans.

She was speaking at the online CCXI & Moody’s China Credit Outlook Conference on Tuesday.

China’s town-level and small rural banks are more exposed to risk than their larger peers even though their assets account for less than 1 per cent of the total among all Chinese banks, according to Nicholas Zhu, vice-president at Moody’s.

“We can’t say the risk is small,” he said. “Small rural financial institutions have potential systemic risks” which could spread to the wider financial sector.

As an example he cited the Henan banking scam in April, in which 40 billion yuan (US$6 billion) in deposits – gathered via fintech platforms – disappeared. The crisis affected customers nationwide because the deposits were made digitally rather than in a local branch.

“Very small rural financial institutions [can] have the effect of penetrating the whole nation on the liabilities side, the impact is not limited to the local level when the risks burst.”

Rural banks have the highest bad loan ratios in the industry, at more than 3 per cent as of the end of September, the analysts said.

Their burden only grew when they were told by Beijing to help companies – particularly small businesses – which have been hit hard by the pandemic, said Wen at CCXI.

The banks had extended 16 trillion yuan of loans to these companies as of the end of 2021, she said.

“Against the background that the economy still hasn’t recovered and amid the pandemic flare-ups, some of these loans’ payment at maturity still face uncertainties as these market participants haven’t got rid of the burden of the pandemic.”

The lenders’ recent increase of aid to property developers under the guidance of the central government could also increase their burden.

The extension of loans to developers for as long as 2.5 years, as stipulated in the official 16-point rescue plan to ease homebuilders’ financial pressure may add further uncertainty, said Zhu, as the outlook for the sector remains decidedly gloomy.

Additionally, homeowners’ efforts to pay back their mortgages earlier in a bid to ease their own debt burdens are forcing banks to reinvest the proceeds in other assets, which makes it hard to ensure big returns in the current market conditions, he added.

On the broader economy, Mao Zhenhua, CCXI’s founder and chief economist, predicted that China’s growth will reach about 5 per cent in 2023, accelerating from a low base this year, as Beijing loosens Covid-19 restrictions. UBS also forecast 5 per cent, while Goldman Sachs expects 4.5 per cent by Goldman Sachs and Barclays sees a 3.8 per cent growth rate.

Mao said policies aimed at curbing the spread of the coronavirus will be the biggest factor determining China’s economic growth next year.

“If next year it can’t reach 5 per cent, then it may not reach 5 per cent for a very long time, because next year’s target already factored in the low base,” he said. (South China Morning Post)