Local bond market’s problems heighten Chinese banks' credit risks

The bond market’s repayment woes may force banks to make concessions for the sake of financial stability.

Chinese banks face an ongoing and amplified Catch-22 in the aftermath of the pandemic. Whilst asset quality remains under control, the financial sector’s bond market is facing considerable pressure whilst credit risk polarization is likely, reports Natixis Asia Research.

Overall asset quality of banks in China remains under control, the report said. Thanks to the quick economic rebound, the decline in banks’ profitability is relatively mild in China compared to global peers. The net income growth of Chinese banks decelerated from 6.9% in 2019 to 0.7% in 2020, but still outpaced the 44% contraction recorded from the rest of the world.

Chinese banks’ stressed loan ratio also fell from 4.8% in 2019 to 4.2% in March 2021, in part thanks to faster loan growth and a rather aggressive write-off policy; banks have written off 0.7% of total loans in 2020, which is higher than the 0.45% for global peers.

But the stressed loan ratio may not provide a full picture of Chinese banks’ credit risk. A more timely measure of asset quality is the bond market, which shows that bond issuers have delayed more repayments and that there is now a polarization of credit risks amongst different types of ownership, sectors and provinces, notes Natixis’ chief economist for Asia Pacific Alicia Garcia Herrero.

Credit polarization is expected to come not only amongst and within state-owned enterprises (SOEs) and private firms (POEs), but also across sectors and provinces--this means that banks and bond issuers doing best will become better, whilst those faring badly will become even worse.

Banks may also eventually find themselves having to make concessions given this ballooning bond problem. The shadow cast by the drama surrounding Huarong Asset Management Company, in particular, may push China’s regulators to force banks to make concessions for the sake of financial stability.

New regulations aimed at containing financial risk have also increased repayment pressure for POEs. In particular real estate developers, which are largely privately owned, are at the eye of the storm forming 31% of onshore bonds with repayment pressure so far in 2021.

Still, the pressure is concentrated in a few provinces, such as Hainan, Liaoning, Hubei and Tianjin. In the same vein, local governments with less fiscal space may face higher difficulties in supporting the firms in their own provinces, Herrero notes.

Overall, local banks are expected to continue their rapid loan write-off and asset securitization. This means that heightened credit risk in the aftermath of the pandemic will, at least, be shared by the rest of the economy.

Join Asian Banking & Finance community
Since you're here...

...there are many ways you can work with us to advertise your company and connect to your customers. Our team can help you dight and create an advertising campaign, in print and digital, on this website and in print magazine.

We can also organize a real life or digital event for you and find thought leader speakers as well as industry leaders, who could be your potential partners, to join the event. We also run some awards programmes which give you an opportunity to be recognized for your achievements during the year and you can join this as a participant or a sponsor.

Let us help you drive your business forward with a good partnership!

Anju Abrol has over 30 years of banking experience.
Tse Yi-Mun will lead the bank’s north Asia branch as its managing director and group head.
Clients can now purchase SC Hong Kong’s wealth management products.
Citi plans to offer around 100 types of wealth products from the mainland.
Agents can apply for the loan through the BRILink Mobile application.
The delinquency ratio has been on the decline since May 2018.
The market is forecasted to rebound by over 15% in 2021.
The fund aims to achieve a potential monthly dividend payout of 5% per annum.
Its Vice President of Solution Consulting in Singapore discussed how to bridge the digital gap and humanise the banking experience in the new normal.
There is an increased demand for loans for home purchases and 'jeonse.’
The partnership is eyeing 16 million customers by 2025.
The U-Energy platform has nine partners that can support energy efficiency projects.
The bank expects its own climate financing in 2019-2021 to reach $17b.