That high-profile task, most acutely demanded in the management of small banks and local government financing vehicles – as well as in resolving vulnerabilities in the country’s property market – is expected to remain high on the agenda at the annual tone-setting central economic work conference, usually held in December.
Weakness in the property sector and local government-related exposures could continue to weigh on overall loan demand and asset quality
Analysts and officials expressed hopes the change would restore stability and address asset quality issues within the local financial sector, which has been plagued by bad governance, corruption, exposure to an ongoing property crisis and a preponderance of shadow banking – a headache in addressing the volume and quality of local government debt.
Provinces should come up with their own plans, instead of a one-size-fits-all approach, he added.
“Weakness in the property sector and local government-related exposures could continue to weigh on overall loan demand and asset quality,” said Elaine Xu, director for Asia-Pacific financial institutions at Fitch Ratings.
Such risks are generally higher for small and mid-sized banks compared to larger state-owned institutions, despite efforts to reduce shadow banking activities in recent years, she said.
The People’s Bank of China (PBOC) had said in November that financial risks are “overall convergent” and “generally controllable”.
There were more than 300 high-risk banks in China as of June, but their assets accounted for less than 2 per cent of the overall banking sector. Cumulatively, that sector represents over 90 per cent of the 449 trillion yuan (US$63 trillion) in overall assets at all financial institutions in China, according to the PBOC.
The non-performing loan (NPL) ratio of all of China’s commercial banks was 1.61 per cent at the end of September, down from 1.66 per cent a year earlier, according to the NAFR.
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The ratio for urban commercial banks at the end of September was 1.91 per cent, while that of rural banks was 3.18 per cent, much higher than 1.27 per cent for state-owned institutions.
The NPL ratio measures the share of loans in default for a specific period to overall banking lending, and is one of major indicators for credit risk controls used by lenders and financial regulators.
Fitch Ratings’ Xu said reported asset-quality metrics, including the headline NPL ratio, do not take into consideration off-balance-sheet exposures or non-loan assets at banks.
Risks remain in the economy, especially if prolonged property stress were to last beyond 2024 and more widely spread to different sectors,
Forbearance – a temporary pause in payments or an allowance to make smaller payments – around some property development loans could also understate reported asset quality metrics as these may not be reported as NPLs, she added.
“Risks remain in the economy, especially if prolonged property stress were to last beyond 2024, and more widely spread to different sectors,” she said.
China has been long implementing a prudent personal housing loan policy, Pan said, adding that property-related lending accounts for 23 per cent of total bank loan balances, of which about 80 per cent are personal housing loans.
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Ding Shuang, chief Greater China economist at Standard Chartered Bank, said while the risks associated with the personal housing loans are generally small, the precondition is that there would not be any steep falls in housing prices.
As many property developers are suffering from a liquidity crisis, some local governments have recently increased their tolerance to falling housing prices to push for more deals, Ding added.
“The key is to find a balance, a price where the market can clear [inventory] but avoid any overshooting that a sharp fall in asset prices prompts more people to sell off, and then becomes a vicious cycle,” he said.
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Risks associated with existing loans by property developers are relatively small, as banks have refrained from issuing additional lending in the past two years, but the potential crisis lies in the lack of credit support from the banks, Ding said.
Goldman Sachs expects the tone of the central economic work conference, which is expected to set economic goals for 2024, “to be dovish and pro-growth”.
“These tasks include facilitating the stable development of the property sector through urban village renovation and social housing construction programmes, and preventing risks around local government implicit debt and small to medium-sized financial institutions.”
At some point next year, the issue of home delivery could turn into a social issue
While Beijing vowed to “meet the reasonable financing needs from developers”, economists said that is much easier said than done as banks are still reluctant to lend due to the credit risks involved.
Lu Ting, chief China economist at Nomura, said Beijing may need to eventually play the role of so-called lender of last resort to rescue some major troubled developers to boost confidence in the real estate market and enhance financial stability.
“Amid the collapsing property sector and widespread credit fallout among property developers, homebuyers might get increasingly impatient while waiting for the delivery of their purchased new homes,” he said in November.
“At some point next year, the issue of home delivery could turn into a social issue and endanger social stability, and Beijing may eventually need to significantly ramp up policy support.”