The Chinese banks industry reached a total asset value of almost $32 trillion in 2015, accounting for 58% of all Asia-Pacific’s assets and making it the world’s single largest banks industry by a considerable margin, according to research firm MarketLine.
Despite economic growth slowing in recent years, China’s banks industry has continued to record dynamic, double-digit year-on-year growth, and although deceleration is expected between 2016 and 2020, a strong compound annual growth rate of 9.9% is projected.
MarketLine’s report shows that bank credit in China is a much smaller segment than is seen for the global industry as a whole, meaning that it is less exposed to credit issues than countries like the US and the UK, where bank credit accounts for a far larger portion of total industry value.
However, MarketLine’s Analyst Nicholas Wyatt explains: “The effects of a slowing economy are starting to be felt by China’s largest banks and should be taken as a warning sign. There are signs that the slowing of the country’s still-impressive GDP growth is beginning to impact banks by way of an increase in non-performing loan (NPL) rates.
“Bank of China and Industrial and Commercial Bank of China (ICBC) saw noticeable increases in their NPL rates during 2015, necessitating greater allowances for credit losses, while Agricultural Bank saw something of a surge. If this becomes a longer-term trend, these banks will have to continue making larger allowances, thus reducing net profits.”
China’s ‘Big Four’ are, in terms of assets, four of the five largest banks globally, so these rates are highly unlikely to cause the collapse of a bank similar to those seen in the West in 2008. The Chinese banking industry remains heavily government-influenced, and a report by the United States Congressional Research Service claims China’s banks must negotiate both commercial considerations and strict government directives.
Wyatt continues: “This latter factor is partly responsible for NPL rates increasing. The Chinese government continues to invest heavily in infrastructure projects in order to raise its political profile and provide better living conditions. However, construction is the biggest area of concern regarding NPLs, suggesting banks are not necessarily lending according to traditional credit conditions.”
The country’s four largest banks (ICBC, China Construction Bank, Agricultural Bank of China, and Bank of China) are partly state-owned, and are therefore not necessarily able to operate with 100% autonomy. MarketLine believes this will shield the banks from serious trouble, but will also mean they continue to lend to businesses that are perhaps not as credit-worthy as they should be.