Update | China’s small banks vulnerable to bond sell-off, analysts say
Bank of China report estimates a 3pc bond price decline will hurt banks’ net profits by an average 2pc; Bank of Nanjing and Ping’An bank could see 6.8pc, 4.7pc falls
The pressure on Chinese bonds is set to hit banks in the short term, analysts say, with smaller banks particularly vulnerable should yields rise and liquidity tighten.
Nonetheless, the fact that the People’s Bank of China still seems able and willing to step in, means that any major crisis remains some way off still.
On Friday, yields of Chinese 10-year government bonds stood at 3.01 per cent, down from a high of 3.46 per cent earlier in the month, but still higher than at any point in 2016 before early December.
Bond yields move inversely to their price. This means that one short term impact of rising yields and falling prices on banks is that they will lose out if they have to sell the bonds that they already hold.
A recent report from Bank of China International (BoCI) reseachers led by Yuan Lin estimates that a 3 per cent bond price decline would hurt banks’ net profits by approximately 2 per cent.
The exact size of the loss would depend on the number of bonds banks could keep until maturity, as opposed to those they would have to sell to meet liquidity requirements.