The slowdown in bank lending growth in China is likely to slow further after the slowest gain in more than 15 years in attempts to dampen the real estate market.
Concerns over the repayment capacity of borrowers, especially in the real estate sector, following the debt crises of China Huarong Asset Management Co. Ltd. and China Evergrande Group, could force banks to tighten credit. Power shortages and growing inflationary pressure could dampen investment, as policymakers have focused more on debt risks rather than economic growth.
Loan growth could drop the 11.4% year-over-year increase reported for September, which was the weakest pace since March 2006, analysts said.
âThe main difference this time around is a further tightening of developer funding and a greater tolerance for slower growth,â said Michelle Lam, Hong Kong-based Greater China Economist at SociÃ©tÃ© GÃ©nÃ©rale. “The latter is of particular importance because policymakers are seen to always give in when there is more pressure from an economic downturn.”
China’s year-on-year GDP growth slowed to 4.9% in the September quarter, from 7.9% in the previous three months, according to an October 18 statement. Real estate production fell 1.6% from the previous year and construction fell 1.8%. The two sectors accounted for 13.7% of quarterly GDP. Growth in industrial production slipped to 3.1% from 5.3%. The sector remained the largest part of the economy with 32% of production.
Corporate debt was around 160% of China’s GDP as of September 30.
âThis credit boom has been going on for several years, and many Chinese companies have struggled before,â said Chris Leahy, founder of strategic consulting firm Blackpeak in Singapore. “I think Evergrande is just a poster because the number is staggering.”
Risk in real estate
Chinese lenders are likely to be more cautious in financing real estate developers due to concerns over “lower overall profitability and potential for credit risk, âsaid Gary Ng, senior economist at Natixis.
As part of efforts to deleverage and curb rising house prices, the Chinese government launched in August 2020 the “three red lines policy”, which sets thresholds on expected revenues, leverage ratios and liquidity for developers. Regulators would place limits on the extent to which developers can go into debt if they fail to meet at least one of the three ratios.
Developer loans accounted for 7% of the country’s total banking system lending as of September 30, according to Societe Generale’s Lam.
At least 14 listed real estate companies in mainland China and Hong Kong had a one-year probability of default above 20% at the end of June, well above the industry median of 0.8%. S&P Global Market Intelligence figures represent the odds that a company will default on its debt over the next year based on fluctuations in the company’s stock price and other risks related to country and country. ‘industry.
“This is of great concern to policymakers as it implies greater economic fragility in the face of unexpected shocks,” said Chang Weiliang, Singapore-based fixed income and credit strategist at DBS.
Always resilient system
Dynamic lending activity has boosted interest income for Chinese banks, some of which have emerged as the world’s largest lenders with assets of growing global systemic importance in recent years. Interest income accounts for about 70 to 80 percent of the income of China’s four largest state-owned banks, according to their latest earnings reports.
A slowdown in loan growth and house prices is a “fundamentally positive development âfor the Chinese banking system, according to an Oct. 20 report from S&P Global Ratings.
âGDP levels and GDP per capita continue to rise at solid rates, which adds buffers against credit risks in the economy. These factors could eventually lead us to assess economic risk more favorably for the Chinese banking sector, if the policy direction remains clear and is executed consistently, âthe report said.
China’s financial sector sentiment score has improved in recent months amid a slowdown in lending, while the real estate sector‘s score has fallen over the same period. Scores, designed by Market Intelligence, extract sentiment signals from company statements and earnings call transcripts.
âChina’s new political goal of ‘common prosperity’ has changed political attitudes towards speculative real estate investments, and there are now tougher crackdowns than in the past,â said Chang of DBS. .
As of October 20, US $ 1 is equivalent to 6.39 Chinese yuan.
Aries Poon and Mohammed Hadi contributed to this article.