Great wall
of worry looms over China's banks
A spate of bank runs underscores the complex
task confronting Beijing as it seeks to deal with its legacy of debt at a time
when growth is getting crunched by the trade war with the US.
Nov 14, 2019 — 4.58pm
As Mike Henry slips into BHP's top job he
should be keeping a wary eye on China's banking sector.
The Big Australian has profited handsomely from Beijing's
liberal - arguably reckless and imprudent - use of debt to soup-up growth in
the world's most voracious consumer of commodities. But the miner's new boss
confronts a very different reality from his predecessors: a slower growing China struggling to
shake off a debt binge hangover.
Reports of a spate of bank runs and regulators
scrambling to contain the mess underscores the stresses in the world's largest
banking sector as slowing growth, weak exports and crimped cash flows pressure
the ability of borrowers to service China's very large mountain of debt.
Jitters about the financial health of banking minnows in the
provinces of Liaoning and Henan are just the latest data points highlighting
the pressures on China banks.
Earlier this year, Beijing orchestrated the bailouts of
three smaller lenders in as many months, volunteering industry giant Industrial
and Commercial Bank of China into "national service" to help buttress
the wobbly balance sheet of one lender gone awry.
President Xi Jinping has acknowledged
the problem by focusing on de-risking China's economy and
financial system by reining in leverage. The conundrum is how to deal with the
risk without crushing growth and igniting financial instability.
It's a serious concern given regime legitimacy depends on a
growing economy and plenty of jobs.
The days of stop-start credit-fuelled growth appear to be
over if the latest credit data is any indication. New loans fell to the lowest
level in nearly two years.
The question is whether Beijing can resist pulling the
trigger on another big credit splash if growth goes pear-shaped? Mike Henry may
hope the temptation proves too great.
China bears, who have long - but so far wrongly - forecast a
financial crisis, reckon Beijing will struggle to rein in leverage - which has
risen from 155 per cent of GDP in 2008 to 280 per cent in the second quarter of
this year - without imperilling economic growth and financial stability.
RELATED
Such a massive accumulation of debt may have been easily
digestible in the days of double-digit growth. Not so much now with growth
bumping along at a 30-year low of 6 per cent - if the numbers are to be
believed.
Compounding the issue is the deflation stalking China's
manufacturing heartland. Weak demand thanks to the trade war, combined with
overcapacity (funded by, you guessed it, easily accessible debt), has forced
down wholesale prices.
That deflation is toxic for business borrowers as it pushes
up real - or inflation-adjusted - interest rates on their debt.
According to JPMorgan, interest payments were equivalent to
about 69 per cent of new credit in the first half of 2019, which implies that a
growing amount of new debt is being used to service existing debts.
It's important not to tar all of China's banks with the same
brush. The big four banks report non-performing loans of around 1.5 per cent, a
number that prompts guffaws from more bearish analysts.
That China's banks trade around 0.65 times book value
strongly suggests investors are somewhat sceptical when it comes to reporting
of NPLs.
But NPLs are much higher among smaller lenders, especially
those which enthusiastically embraced shadow banking.
Beijing's tightening of regulations is tacit acknowledgement
it was too slow to yank on the leash of shadow banking.
New research from the Bank for International Settlements underscores
the risks to China's economy from the rapid growth of a shadow banking sector
with Byzantine complexity.
What makes the research interesting is it was penned by a
People's Bank of China insider, Guofeng Sun, a director general of the bank's
research institute.
He concludes that shadow banking drove up banks' credit
risks and they "have not adequately assessed that risk or taken
appropriate countermeasures".
He adds that it "undermines the effect of monetary
policy" and warns the effectiveness of some regulatory policies and tools
had been "compromised or partially offset by the shadow banking
system".
China is a dealing with a problem of its own making. The
slow growth and deflation that has cursed Japan's economy after its credit boom
in the 1980s should have served as a salutary lesson on the dangers of debt for
Chinese policymakers.
Unfortunately not. The jury is still out as to whether
Beijing can prove this time will be different.
No comments:
Post a Comment