China’s banks grapple with growing risks as non-performing loans surge and yields fall, investors are also worried about the health of the world’s second largest economy. The situation of Chinese banks is worsened by the fact that many of them also finance large sums of infrastructure projects of local governments, in addition to having significant exposure to the already troubled real estate sector.
It is not by chance that one can see a sharp decline in the price of bank shares, which has not been seen for about eight years.
It further increased the sales wave Goldman Sachs’ recent decision to downgrade several major banks to “sell” ratings, which resulted in a drop of more than 10% in the Hong Kong banking sector stock market index in three trading days. The Goldman Sachs report highlighted that banks will have to write down loans to the real estate sector and that banks’ profits will be burdened by extending or refinancing loans and other lending to municipalities.
According to Raymond Yeung, chief economist at ANZ Greater China, the debt risk associated with local government projects may ultimately fall to the public sector, including China’s state-owned commercial banks. However, he also noted that central government is aware of the size of these debts and where the vulnerabilities are, reducing the likelihood of systemic risks.
However, Gary Ng, chief economist at Natixis Corporate & Investment Banking in Hong Kong, warned that if local government revenues continue to deteriorate, the non-performing loans of some Chinese banks may increase.
The country reported strong new bank lending in the first two months of this year, but earlier this year bankers revealed that the increase in loans is largely due to loans for policy-driven infrastructure projectsas some major banks offered interest rates below 2% to state-owned enterprises, putting pressure on margins.
In the past decade, the net interest margin of Chinese banks has shrunk by one percentage point to around 1.7% by the first quarter of 2023, according to Refinitiv data. His AP/E ratio is nearly 4, which is half of the 2018 value.
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