China’s banks bear brunt of concerns around growth and debt

Chinese banks are facing increasing risks from rising non-performing loans (NPLs) and diminishing returns, making them a lightning rod for investors’ worries about the world’s second-largest economy.

Concerns about their exposure to local government financing vehicles (LGFVs), the investment firms that fund mainly infrastructure projects for local governments, and the crisis-hit property sector have pummelled their shares this week, dragging them to their steepest drops in about eight years.

Authorities appeared anxious to nip the selloff after Goldman Sachs’ (GS.N) downgrade of some major lenders to “Sell” ratings caused the Hong Kong-listed banking sector index (.HSMBI) to tumble more than 10% in three sessions.

Goldman’s three-part series refers to banks’ writing down loans to the property sector as well as the pressure on bank profits as they expand or roll over loans and other lending to LGFVs.

Goldman’s report is based on “pessimistic assumptions”, the state-backed Securities Times said in an editorial on Friday, and that there was “a misinterpretation”.

That temporarily put a floor under shares of banks such as Industrial and Commercial Bank of China (ICBC) , which is down 13% in two months, but failed to boost sentiment in markets hobbled by China’s stop-go stimulus announcements, sagging demand and worries that banks will be pressed into helping.

“LGFVs’ debt risk may ultimately need to be borne by the state sector, including China’s state commercial banks,” said Raymond Yeung, chief Greater China economist at ANZ.

“The central government knows what’s happening regarding the size of the debts and where the weak links are, so the probability of systemic risks will be greatly reduced. The possibility of defaults by a large number of LGFVs is low.”

Sell-side analysts seemed to concur that the risk of a crisis emanating from the gargantuan $13 trillion LGFV debt pile is low, but banks will still take a hit from rising non-performing loans and falling returns.

“If local governments’ revenues continue to worsen, then NPLs among some Chinese banks may go up. Chinese banks would have to shoulder up this cost,” said Gary Ng, senior economist at Natixis Corporate & Investment Banking in Hong Kong.


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Source: Reuters

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