Takeaway from Natixis China Banking Monitor 2018

The Natixis China Banking Monitor 2018 offers a thorough bottom-up analysis of the health of China’s banking sector, broken down into four main issues: asset quality, liquidity, profitability and solvency. It looks at asset securitization and the creation of local and bank-level management companies as key instruments of the banking sector clean up, as the previously relied upon debt-to-equity s waps have fallen out of flavor. The soundness of Chinese banks remained relatively stable in 2018, against a backdrop of lower growth and laxer monetary policy. Lower wholesale funding costs did not translate into cheaper lending, particularly to the private sector, which helped sustain banks’ profitability against a very significant negative shock; the clampdown on shadow banking, wh ich lowered banks’ fee incomes. The above, relatively stable situation, occurred in parallel with the ongoing clean-up of balance sheets, but with more reliance on asset securitization and the creation of bank-based asset management companies, rather than debt-to-equity swaps which was the case last year. In the midst of the clean-up, the rapid economic deceleration has pushed the Chinese leadership towards a new stimulus, pushing for more bank credit to the private sector. Banks, with stretched balance sheets and looming asset quality issues do not have the capital to meet such expectations, which explains the regulators’ green light for banks to issue perpetual bonds and the PBoC’s agreement to (temporary) purchases of such perpetual . In essence, the ongoing clean-up will need to continue while a new credit binge takes place in banks’ balance sheet. It is hard to tell whether there will be enough time to complete the clean up before more bad assets pile up. The waves for Chinese banks’ restructuring seem to be getting shorter and shorter.