Further financial reforms planned as bad debts rise
August 20, 2019 Category China News Round-up, Weekly
China will remain firmly committed to continuing economic opening-up and broadly deepening financial reforms, including renminbi exchange rate liberalization, despite the ongoing trade tensions, according to Pan Gongsheng, Vice Governor of the People’s Bank of China (PBOC) and Director of the State Administration of Foreign Exchange (SAFE). Zhou Xiaochuan, Chairman of the China Institute of Finance and former PBOC Governor said China should attach great importance to the expansion of the yuan’s global usage. He also warned that China should get prepared for long-term trade disputes. China’s further financial opening-up may be affected by the wait-and-see mood among global investors amid the China-U.S. trade disputes, said some experts. Shanghai will ease restrictions on foreign capital in the service sector for getting access to the city’s market and launching businesses.
China’s bank lending weakened in July, suggesting Beijing’s stimulus efforts were not working properly. Chinese banks extended CNY1.06 trillion in net new loans last month, down from CNY1.66 trillion in June. There was a significant drop in corporate lending in July, plunging by two-thirds to CNY297.4 billion from CNY910.5 billion the month before.The slump raises questions over the need for additional credit easing – when a central bank sets lower interest rates, for example – from the PBOC to offset the effect of a weakening economy. New household loans, mostly mortgages, fell to CNY511.2 billion in July from CNY671.7 billion in June. There was also a sharp slowing in national aggregate financing, which grew by CNY1.01 trillion in July, less than half the CNY2.26 trillion gain in June and much lower than expectations of CNY1.63 trillion. Growth in M2 money supply slowed to 8.1% in July, down from 8.5% in June and below the forecast 8.4%. There was a deeper contraction in shadow credit last month, probably due to a regulatory crackdown, according to Julian Evans-Pritchard, Senior China Economist at Capital Economics.
Chinese banks have reported an increase in bad debts and a decline in the capital adequacy ratio in the second quarter, as the year-long trade war has hit the country’s economy hard. Total non-performing loans (NPLs) in China’s banking system rose to CNY2.235 trillion during the three months to June, up CNY78.1 billion, or 3.6% from the first quarter of this year. The NPL ratio edged up by a marginal 0.01 percentage points to 1.81% during the quarter, according to the China Banking and Insurance Regulatory Commission’s (CBIRC). The rising bad debts come as China’s sovereign wealth fund earlier this month took over Hengfeng Bank, the third case in as many months of the state taking over a troubled lender. Chinese banks’ core tier 1 capital adequacy ratio declined to 10.71% at the end of June, down 0.23 percentage points from three months earlier. Banks’ liquidity ratio dropped to 55.77% at the end of June, down 1.04 percentage points from the previous three months. The three measures of shadow banking included in PBOC data – outstanding entrusted loans, trust loans and banker acceptances – decreased by 10%, 4.3%, and 15%, respectively, by the end of July from a year earlier.
China’s industrial production in July grew by 4.8% – its lowest rate since February 2002 – with retail sales growing by 7.6% in July, down from 9.8% growth in June. Analysts expect consumer spending to slow further for the rest of the year due to trade war tensions. But according to Liu Aihua, Spokeswoman for the National Bureau of Statistics (NBS), the economy in July continued to perform within the reasonable range. Market expectations that the PBOC will adopt an easing policy are rising, after China’s industrial output growth fell to 4.8% in July.
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