Page Three - Chinese Banks

This week, investor attention will be focused on the headlines from the National People’s Congress which starts on Wednesday. One sector that could be impacted by the personnel appointments and policies that emerge from the event are the Chinese banks.

We have been actively following Chinese banks since July, anticipating that the companies would continue to show improved profitability, be a net-beneficiary of the stricter regulatory environment set out by the China Bank Regulatory Commission (CBRC) and be supported by an improving economy before the political transition. Over the next two weeks, the sector will be reporting Q3 earnings commencing with top-performer, ICBC, on Tuesday.

Great piece CP,

Here is the largest threat to the bull case for Chinese banks

This is from Nicolas Lardy's wonderful presentation at the Peterson Institute of Chinese Financial Stability in early October. The point is simple. When the CBRC started clamping down on Shadow Banking / Wealth Management Products (WMPs), the consequence was a collapse in the growth rates of inter-bank lending. Small and medium size banks were arbitraging the capital requirements by lending to Trust banks with a low capital requirement for what were effectively risky investment products. The regulators clamped down on this, requiring banks to set asset much larger sums of capital against these loans, forcing de-leveraging. This was initially viewed as a positive for the the major banks as loan demand was forced back into traditional channels. However, with further restrictions being implemented at the start of 2018, there is a good chance that inter-bank lending goes negative and this could see a further contraction in overall credit growth.

Cindy, love your thought



In the 2nd quarter, the PBOC restricted liquidity to the interbank market sending rates sharply higher and lowering activity. This was done in part to squeeze out some of the more speculative lending done using that facility. The big banks were actually a net beneficiary of this because they are providers of funds to interbank market. However, the smaller banks were severely squeezed. This is one reason for the big divergence of big bank-small bank price performance this year. There are some advocating buying the smaller banks as a catch-up play and as benefiting the most from recent RRR targeted hike, however, I wouldn't make this switch yet. At the margin, the bigger banks will weather any increased regulations from the authorities better than their smaller counterparts.