Chinese banks may not have enough capital to lend economy out of slowdown, says Fitch

Date: Wednesday, July 10, 2019
Source: South China Morning Post

  • ‘Banks’ earnings in the past few years have only been able to sustain their [required] capital adequacy levels,’ said Fitch executive Grace Wu

  • Beijing is leaning further on the private sector to buffer the slowdown and is requiring banks to lend more to these firms, without raising borrowing costs

Chinese banks do not have adequate capital to support the sort of large-scale lending that could bolster economic growth in the world’s second-largest economy, Fitch Ratings has said.

The global credit rating agency has predicted China’s economy to slow from 6.2 per cent this year to 5.8 per cent in 2021. Grace Wu, senior director and head of Fitch’s Greater China banks business, believes that “the peak of the US tariffs has yet to come”.

The US and China agreed to a temporary trade war truce last month as the impact from the year-long dispute began to bite their economies and broader global trade.

“Looking at the overall banking system, banks’ earnings in the past few years have only been able to sustain their [required] capital adequacy levels,” Wu said at an event in Hong Kong on Tuesday.

What is currently available in the banking system is not sufficient to support any large-scale lending designed to prop up economic growth, since regulators have required banks to raise their capital reserve levels, Wu said.

“And this will affect China’s economic slowdown.”

China’s banks have accumulated a mountain of debt by lending to cash-strapped companies and loss-making projects. The economic slowdown has risen the stakes for both banks and businesses, especially the private enterprises that are traditionally shunned by state-owned lenders, which preferred state firms that are implicitly backed by the government.

Beijing is leaning further on the private sector to buffer the slowdown and is requiring banks to lend more to these firms, without raising borrowing costs.

Still, Wu said with the existing capital controls, she did not expect lending growth in the second-half of the year to go beyond the 12 to 13 per cent increase rate seen over the past few years.

The asset quality of banks has also deteriorated on the back of the slumping economy, she said, but with lenders intensifying efforts to write off non-performing loans, banks’ books should improve.

Beijing is embarking on a balancing act in accelerating the opening up of the country’s US$44 trillion domestic financial sector to shore up capital, while ensuring that its banking system remains stable.

Smaller banks – city commercial and rural banks – are more vulnerable, as they are usually more deeply invested with local enterprises and steeped in debt. Fitch said city commercial and rural banks each made up 13 per cent of banking assets at the end of May. They also have weaker funding and liquidity profiles, and are more exposed to shadow financing activities, according to Fitch.

 

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