China Banking Distress a Reflection of Slow Growth

EghtesadOnline: For the past four years, analysts at Fitch Ratings and Wall Street banks have shared a consensus: a credit crisis will break out in China at any time.

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08 September 2016

Their prediction was based on two factors: China’s economy was slowing sharply, and bad debts would lead to bank runs. Above all, the country’s debt-to-GDP ratio was alarmingly high and climbing. But, four years on, a credit crisis seems a more remote possibility.

Look at the current situation: China’s banks are still very liquid; loan growth has stayed at a 10% clip; public confidence in the banks is unquestioned; and external debts are manageable, news outlets reported.

It is true that the number of officially reported bad debts may be only a fraction of the actual figures. It is also true that some banks may be running on a very low or even negative equity as their bad debts may have wiped out their capital cushion.

But does that really matter? Capital cushions are there to be wiped out, by design. In bad times–like today–capital gets depleted, and come the good times, the banks will make a killing and build the cushions again. Even in bad times such as these, China’s banks continue to pay very high dividends despite analysts’ constant talk of rising bad debts and thin capital cushions.

A slower economy is the cause of banking distress in China and parts of Europe. But if the governments of Italy, Greece, Portugal and Spain had China’s kind of total freedom in setting fiscal and monetary policies, their own banking sector distress would be much easier to manage.

Gov’t Banks Retrench Thousands

China’s biggest state-owned banks retrenched thousands of staff members as the country’s banking industry faced its most challenging year amid a slowdown in the world’s second biggest economy.

The top four national banks, which reported negative to flat net profit growth for the first half of this year, reported a combined total of 22,260 jobs that have been eliminated, Hong Kong-based South China Morning Post recorded.

The redundancies are a cause of major concern because total staff employed by the banking sector had reached a peak of 1.87 million at the end of 2015.

As the economic slowdown continued, China has already announced that its plans to cut over-capacity in steel and coal production that could result in further 1.8 million job losses.

The 2.3 million strong Chinese military too is set to retrench 300,000 personnel by next year.

Stocks End Flat

China stocks were little changed on Wednesday, with falls in consumer and healthcare shares offset by gains in infrastructure and raw materials firms, as Beijing vowed to step up fiscal policy efforts to support the economy.

China’s State Council, or cabinet, also said it would encourage policy banks to extend more credit and reaffirmed the government’s commitment to reducing overcapacity.

The CSI300 index fell 0.1%, to 3,340.82 points at the end of the morning session, while the Shanghai Composite Index gained 0.1%, to 3,092.41 points.

Foreign exchange reserves fell to $3.19 trillion in August, central bank data showed on Wednesday, in line with market expectations and the lowest level since December 2011.

Reserves fell by $15.89 billion in August, the biggest drop since May.

Economists polled by Reuters had predicted reserves would fall to $3.19 trillion from $3.20 trillion at the end of July.

China’s reserves, the largest in the world, fell by a record $513 billion last year after Beijing devalued the yuan currency, sparking a flood of capital outflows that threatened to destabilize the world’s second-largest economy and alarmed global markets, according to Financial Tribune.

China’s gold reserves fell to $77.18 billion at the end of August, down from $78.89 billion in end-July, data published on the People’s Bank of China website showed.