Chinese bank liquidity under strain, warns Fitch

The Chinese banking sector is “under growing strain” as its loan quality continues to weaken and cash buffers are eroded, according to Fitch Ratings.

A new report by the ratings agency says the full extent of Chinese banks’ non-performing loan (NPL) problem remains unclear due to the authorities’ selective policy of forbearance and offering support to distressed borrowers.

Charlene Chu, head of Chinese bank ratings at Fitch, says: “Forbearance, loan rollovers, transfers of assets off-balance-sheet and transactions with non-bank financial institutions may be preventing current stress from becoming apparent in NPL ratios, but cash positions clearly show that Chinese banks are under growing strain.”

Chinese commercial banks have an estimated Rmb 21 trillion (£2.1 trillion) in lending and forbearance capacity and Rmb 16 trillion in deposit reserves at the People’s Bank of China.

When combined this cash should be sufficient to protect banks in the short term, Fitch’s report says. However, if the current deterioration in the banks’ asset quality continues over 2012, their cash buffers could “become more binding”.

Another factor complicating Chinese banks’ liquidity strength is their rapidly expanding wealth management business, which requires them to make large payouts when investors remove their money to invest elsewhere. This is a relatively new issue for the country’s financial system to consider, the agency says.

Chu adds: “Although prolonged forbearance has been successful on numerous occasions in the past, this time Chinese banks are entering the credit cycle with significantly weaker liquidity and a much larger stock of financing to carry.

“It is because of this cash constraint that the forthcoming wave of asset quality issues has the potential to become uglier and more destabilising than in previous episodes of loan deterioration.”

Fitch also claims that the increasing size of the Chinese shadow banking system and the credit problems of the country’s local governments, small businesses and property developers have not yet reached systemic levels.

But it argues that these issues are “not isolated cases of distress, but rather emblematic of excesses from the recent credit boom”.

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