2017—China’s banks are increasingly exposed to policy and other risks, but a crisis is not imminent, S&P Global Ratings said in its report, “Is This The Year For A Chinese Banking Crisis?”
“A banking crisis is likely to be avoided yet again in 2017, in light of another year of GDP growth exceeding 6%, and a change in the credit mix to relieve asset quality. However, the current trajectory is not sustainable,” said S&P Global Ratings credit analyst Qiang Liao.
Credit growth in China has surpassed economic growth for several years running, a dynamic that is gradually depleting Chinese banks’ once-ample funding bases. While overall deposit levels still exceed outstanding credits, the banking sector’s funding and liquidity buffers are thinning.
In 2016, Chinese banks accelerated their lending to the public sector and households, as new loans to the riskier corporate sector slowed. This change in the debt mix has helped keep a lid on nonperforming loans as a proportion of the total. However overall economic leverage continues to rise, diminishing funding buffers and making banks more vulnerable to tail risks.
“Crisis or not, we maintain and re-emphasize our negative credit outlook on China’s banking sector,” said Liao.
“Tail risks for Chinese bank credit profiles include policy risks related to China’s exchange rate, shadow banking, local government debt and corporate bond defaults, a property market correction, and external shocks,” Liao added. There is wide divergence of credit quality within the banking sector.
“We believe public confidence in China’s smaller institutions is much lower than for the megabanks and national banks. It’s not yet apparent if the smaller banks could withstand a stress event, such as a run on deposits,” said Liao.
“Given that many of the smaller Chinese banks are still aggressively expanding credit, and may lack sophisticated risk management, they are more likely to be caught off guard if market conditions rapidly weaken,” Mr. Liao added.
The article notes that smaller Chinese banks are still aggressively expanding credit, but may lack the sophisticated risk management to cope should market conditions rapidly weaken.