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China banks’ stealth meltdown is just getting started


Cutting consumer debt: In just six months, China CITIC Bank culled its investment receivables by almost half to 585 billion yuan (US92bil) as of Sept 30. That figure must be even smaller now after Beijing fired another warning shot in November. — Bloomberg

Cutting consumer debt: In just six months, China CITIC Bank culled its investment receivables by almost half to 585 billion yuan (US92bil) as of Sept 30. That figure must be even smaller now after Beijing fired another warning shot in November. — Bloomberg

CHINA’S banks are in trouble again.

With global markets in turmoil, the sell-off on the mainland hasn't generated as many headlines. That shouldn't be the case. In just four days, banks on the CSI 300 Index tumbled on average almost 11%, erasing the benchmark’s entire gain this year.

In part, it’s because lenders were rallying too fast, as I warned last month.

But traders are also blaming local media reports that say the China Banking Regulatory Commission (CBRC) will make cutting consumer debt a top policy consideration this year.

That news alone can sink bank stocks. Since Guo Shuqing took over as chairman of the CBRC 12 months ago, he’s made reining in the sale of wealth-management products – a huge money-spinner for banks – a priority. Financial institutions fell in line quickly, as evidenced by the decline in investment receivables.

In just six months, China CITIC Bank Corp culled its investment receivables by almost half to 585 billion yuan (US$92bil) as of Sept 30. That figure must be even smaller now after Beijing fired another warning shot in November. It’s a similar picture at other mid-sized lenders such as China Everbright Bank Co and China Minsheng Banking Corp.

But banks have to make money somehow. Replacing wealth-management products has been an explosion in consumer loans, from mortgages to auto and cash advances. Financial institutions in China lent 6.2 trillion yuan to households last year, up 30% from 2016. Should the CBRC turn its blowtorch on that revenue stream as well, bank earnings will take a hit.

Fast move: Guo has made reining in the sale of wealth-management products – a huge money-spinner for banks – a priority. — Reuters
Fast move: Guo has made reining in the sale of wealth-management products – a huge money-spinner for banks – a priority. — Reuters

To be sure, the biggest will get by just fine. They can always rely on their strong deposit franchises for cheap funding and continue lending to low-risk state-owned enterprises. It’s more difficult for mid-sized banks, which rely on the interbank market for funding. Three-month Shibor is at 4.8% versus 2.8% in September 2016.

One may argue that stock market fluctuations don’t matter. But in this case they do, because China’s smaller banks are eager to shore up capital as they brace for stricter cushioning rules.

According to UBS Group AG analyst Jason Bedford, bringing the sector's core Tier 1 capital ratio to 10% would require more than one trillion yuan of capital raising, with smaller and policy banks bearing much of the burden.

In August, Bank of Jiangsu Co reopened the A-share IPO market for lenders, one that had been dormant since Everbright's listing in 2010.

Since then, more than five billion yuan of proceeds have been raised and there are about 20 more financial institutions in the queue. If stocks sink, banks will find tapping public markets difficult because of the unspoken rule that new bank shares can't be sold below book.

I understand Beijing’s argument for deleveraging, but cracking down on consumer lending as well as wealth management seems too onerous, especially on the nation's smaller lenders. They’re the ones providing credit to the real economy, while China’s big four banks can afford to hibernate.

For everyone else, this will be a real wake-up call. — Bloomberg

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder.

Markets , Banking , China , meltdown , banks

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