Over the past decade, China relies heavily on credit growth to finance its economic ambitions. Now the banks in the country feel the limitations of this lending and have to accumulate a lot of capital over the next few years
The way China deals with this challenge will determine its economic health. With 267 trillion yuan ($ 39.4 trillion) of total assets and the home of the four largest banks in the world under this measure, the country's financial system is not operating in isolation. Whatever happens in China will have a global impact.
Large Chinese banks have raised or announced plans to raise 343 billion yuan in 201
The main problem is the contradictory pressure on the sector. Despite debt reduction talks in 2018, when nominal GDP growth slowed down to 9.7%, total loans rose by 13.5%. To support the economy, Chinese banks are lending that exceeds the growth of deposits. Since early 2016, when loans grew by 41%, deposits increased by only 29%. This puts balance sheets under increasing strain. Officially, capital adequacy ratios improve to 13.8% in 2018 from 13.4% two years earlier. In fact, this was only achieved with accounting modesty.
With China's economic slowdown, Beijing is relying on banks to absorb accumulated shadow assets and continue to lend to stimulating growth that depends on investment. With new loans exceeding 20% of new deposits in 2018 and a similar trend expected this year, capital is becoming more limited. Almost any reduction in banks' mandatory reserves in the past year coincided with a significant repayment of the central bank.
Banks just can not continue to borrow as much as no additional capital.
Chinese banks and regulators need to set up a fundraising plan. They started: On Thursday, RBK announced measures to help banks raise capital by issuing fixed bonds. Whether officials also consider convertible bonds or secondary offers – to name but a few – should speed up approvals and encourage firms to cope with their weaknesses in the balance. Expecting an economic slowdown or external event to raise capital is not a prudent strategy. lending to smaller businesses. China has to move away from favoring companies that consume the largest amounts of capital inefficiently. for so long. Regulators have to deal with this problem before a crisis occurs. Christopher Balding is a former Associate Professor of Business and Economics at HSBC Business School in Shenzhen, and author of Sovereign Wealth Funds: The New Intersection of Money and Power