H1 prof­its to boost banks’ as­set qual­ity

China Daily (Hong Kong) - - BUSINESS - By WANG YANFEI wangyan­fei@chi­nadaily.com.cn

Chi­nese banks’ as­set qual­ity will likely im­prove as a prof­itable first half of the year will likely en­cour­age cor­po­rate bor­row­ers to re­pay loans, ex­perts said.

In­dus­trial com­pa­nies’ profit in­creased by 19.1 per­cent year-on-year in the Jan­uaryJune pe­riod, com­pared to sin­gle-digit growth in 2016 and a de­cline in 2015.

Banks’ as­set qual­ity will im­prove also be­cause of reg­u­la­tors’ firm ef­forts to ad­dress the prob­lem of over­lever­aged com­pa­nies, ac­cord­ing to a Moody’s re­port.

Rat­ings agency Moody’s In­vestors Ser­vice re­vised its out­look for China’s bank­ing sys­tem to “sta­ble” from “neg­a­tive” in late July, the first such up­grade since 2015.

Moody’s said the re­vi­sion re­flects an­a­lysts’ ex­pec­ta­tions that the ra­tio of non-per­form­ing loans of banks will be rel­a­tively sta­ble, com­pared to a more rapid de­te­ri­o­ra­tion of as­set qual­ity in the past two years.

The av­er­age NPL-to-gross credit ra­tio de­clined to 1.74 Bad debts fall in high-growth re­gions per­cent in the first quar­ter from 1.76 per­cent in 2016 as the econ­omy grew bet­ter than ex­pected by 6.9 per­cent in the first quar­ter (as well as the sec­ond quar­ter) this year, ac­cord­ing to China Bank­ing Reg­u­la­tory Com­mis­sion data.

“An im­proved econ­omy helps sta­bi­lize the over­all delin­quen­cies as com­pa­nies’ profit con­tin­ued to re­cover in the first half,” said Su Jian, an eco­nom­ics pro­fes­sor Pek­ing Univer­sity.

Data from the Bank of In­ter­na­tional Set­tle­ments showed that China’s cor­po­rate sec­tor credit as a per­cent­age of GDP in­creased only by 4 per­cent­age points at the end of 2016 from a year ago.

That was a smaller in­crease com­pared to the 12 per­cent­age-point growth in 2015.

But, at its mid-year meet­ing at last week­end, the CBRC warned of a po­ten­tial rise in the pres­sure of bad debts.

“The over­all delin­quen­cies will sta­bi­lize, but banks will still face rel­a­tively el­e­vated as­set risks due to high cor­po­rate lever­age and delin­quen­cies of some highly lever­aged and loss-mak­ing bor­row­ers,” said Yu­lia Wan, an an­a­lyst with Moody’s.

Some trou­bled bor­row­ers might find it harder to re­pay loans due to tight liq­uid­ity as the Peo­ple’s Bank of China has changed its pol­icy stance to pru­dent and neu­tral from pru­dent, ac­cord­ing to Xu Chengyuan, chief an­a­lyst with Golden Ori­en­tal Credit Rat­ing Com­pany.

“There is no quick so­lu­tion to the debt prob­lem,” said Xu. “Banks need to im­prove ef­fi­ciency in deal­ing with bad as­sets, and con­sider debt-toe­quity swaps and repack­ag­ing of debts.”

To avoid risks pil­ing up, banks should limit credit to sec­tors with over­ca­pac­ity, while in­creas­ing fi­nan­cial sup­port to emerg­ing high­tech in­dus­tries, said Zhao Qing­ming, chief econ­o­mist at the re­search in­sti­tute of the China Fi­nan­cial Fu­tures Ex­change.

As the econ­omy con­tin­ues to sta­bi­lize, bad debts will grow at slower pace, ac­cord­ing to Zhao.

A re­port by China Ori­ent As­set Man­age­ment in July pre­dicted the turn­ing point for con­tin­ued in­crease in bad debts will come in five years.

Banks’ bad debts ra­tio de­clined in the eco­nom­i­cally af­flu­ent re­gions that wit­nessed rapid growth in the past few years, while debt prob­lems swelled in north­east­ern rust belt re­gions, ac­cord­ing to sta­tis­tics.

In the Jan­uary-June pe­riod, bad loans over gross credit in Zhe­jiang prov­ince, which is re­garded as the east­ern busi­ness zone, dropped to 1.98 per­cent, down by 0.48 per­cent year-on-year, ac­cord­ing to the lat­est data from the pro­vin­cial bank­ing reg­u­la­tory bureau.

The ra­tio started to de­cline in 2016 from the high level of 2012.

In 2012, bank­rupt­cies of a large num­ber of small and medium-sized en­ter­prises in Wen­zhou, one of China’s rich­est eco­nomic hubs, led to bil­lions of yuan in bad debts for banks.

Start­ing from 2016, the China Bank­ing Reg­u­la­tory Com­mis­sion rolled out mea­sures to im­prove credit man­age­ment and reg­u­late en­ter­prises’ er­rant fi­nan­cial be­hav­ior.

The prov­ince’s to­tal amount of out­stand­ing debts might con­tinue to rise given SMEs’ strong ap­petite for fi­nanc­ing. But Zhe­jiang is on track to see a fur­ther de­cline in its bad debts ra­tio, ac­cord­ing to a re­port by China Ori­ent As­set Man­age­ment in July.

Mean­while, bad debt risks con­tinue to in­crease in north­east­ern prov­inces, with many debt-laden tra­di­tional man­u­fac­tur­ing en­ter­prises grap­pling with re­struc­tur­ing.

By the end of June, the bad debt ra­tio in Hei­longjiang prov­ince was 3.38 per­cent, and that of Liaoning prov­ince stood at 2.96 per­cent by the end of first quar­ter, lat­est data showed.

Data from China’s 10 listed banks showed that by the end of 2016, out­stand­ing non-per­form­ing loans of the man­u­fac­tur­ing sec­tor reached 300 bil­lion yuan ($44.6 bil­lion), top­ping the sec­toral list that in­cluded re­tail.

Banks have to im­prove ef­fi­ciency through mea­sures such as credit rollovers in less de­vel­oped re­gions, at a time when firms re­main un­der in­tense credit pres­sure, said Jiang Yuem­ing, a man­ager with China Ori­ent As­set Man­age­ment.

WANG YANFEI Banks need to im­prove ef­fi­ciency in deal­ing with bad as­sets, and con­sider debt-toe­quity swaps ...” Xu Chengyuan, chief an­a­lyst with Golden Ori­en­tal Credit Rat­ing Com­pany

The com­mod­ity is used heav­ily in the con­struc­tion sec­tor, and the elec­tri­cal equip­ment in­dus­try, such as wiring and mo­tors, as well as in smart­phones, tablets and PCs.

“The In­ter­na­tional Mone­tary Fund ad­justed its Chi­nese eco­nomic growth fore­cast back in April and this has helped drive a round of in­creases in the cop­per price,” said You Yang, a bro­ker based in Hong Kong.

The IMF raised its growth fig­ures for the sec­ond big­gest econ­omy in the world by 0.1 per­cent­age point this year and 0.2 per­cent­age points in 2018.

Faster-than-ex­pected GDP growth of 6.9 per­cent in China dur­ing the first six months has sig­naled that sus­tain­able ex­pan­sion will con­tinue.

Key data from in­dus­trial pro­duc­tion to fix in­vest­ments have also been strong.

“The weak­en­ing dol­lar against the yuan has been a con­trib­u­tory fac­tor for this round of in­crease in cop­per price,” said Zhan Sheng, in­vest­ment direc­tor of JZ In­vest­ment, a sub­sidiary of JZ Se­cu­ri­ties.

“A weaker cur­rency means cheaper cop­per in dol­lar terms,” Zhan added.

The dol­lar has fallen about 10 per­cent against the yuan since the start of the year, Bloomberg data showed last week.

Still, the devel­op­ment of new en­ergy cars in China and surg­ing sales in air con­di­tion­ers have boosted de­mand for the com­mod­ity.

In­dus­trial dis­putes in cop­per mines across the world have also played a role in the jump in prices, a re­search re­port from Hu­atai Se­cu­ri­ties in Bei­jing high­lighted.

So far this year, there have been strikes and pro­duc­tion prob­lems in Chile, In­done­sia and Peru, which could re­duce out­put by 44,000 tons this year.

But not ev­ery­one is bullish about the com­mod­ity.

Zhan, of JZ In­vest­ment, be­lieves cop­per prices will fall back to about $6,000 per ton in the sec­ond half of the year be­cause of a slow­down in the con­struc­tion and real es­tate sec­tors, where de­mand for cop­per is high.

Citibank, though, takes a dif­fer­ent view. A re­port by one of the world’s lead­ing lenders fore­casted that prices will surge to about $7,000 per ton by the end of the year due to plans to up­grade China’s power grid and surg­ing de­mand for elec­tric cars and ve­hi­cles.

the price of cop­per on Mon­day af­ter sink­ing to 37,606 yuan back in May.

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