Chinese banks likely to see stable operating environment despite trade war, says Moody’s

Fiscal measures implemented by the Chinese government should help the economy weather the trade war with the US

PUBLISHED : Thursday, 11 October, 2018, 7:33am
UPDATED : Friday, 12 October, 2018, 2:40pm

The operating environment for Chinese banks is expected to remain stable in the near term despite potential pressure on the Chinese economy next year from the escalating trade war with the United States, according to analysts at Moody’s Investors Service.

The Trump Administration has placed tariffs on US$250 billion of Chinese-made goods and threatened to add new levies on nearly all products exported from China, as the US looks to combat what it claims are unfair trade policies by Beijing.

Martin Petch, vice-president and senior credit officer in the ratings agency’s sovereign risk group, said fiscal policy measures taken by the Chinese government, such as easing cash reserves for banks this week to boost lending, may help the economy better weather the trade war.

“You’ve got to remember that there will be a lag,” said Petch. “We are looking at 2019 as having some pressure on the macro economy, with some offsetting pressure from fiscal policy.”

A depreciation in the yuan in recent months is also likely to help ease pressure from the trade war, particularly on businesses dependent on exports.

The asset quality issue does not seem to be deteriorating at this point
Ray Heung, senior vice-president, Moody’s Financial Institutions Group

The comments came as Moody’s hosted a session of its annual banking conference in Hong Kong on Wednesday. The ratings agency is hosting sessions throughout Asia and Europe in October.

Stephen Long, managing director for global banking at Moody’s, said the ratings agency had not changed its forecast for China’s gross domestic product at this point. Moody’s expects GDP to grow at a rate of 6-6.5 per cent over the next few years.

“I think [the impact] will take awhile. It depends on how it plays out,” said Long. “If it ends up being like a Nafta situation, where there is a lot of noise and some negotiation and it all goes away, it will be short lived.”

Ray Heung, a senior vice-president with Moody’s Financial Institutions Group, said banks view the impact of the trade war for the moment as “fairly insignificant”.

“The easing of liquidity conditions will also help corporates in surviving this trade dispute,” said Heung. “If anything, we’ll need a little bit more time to have a better assessment of the overall situation.”

Heung said non-performing loan ratios had improved generally for China’s largest banks. He said that while there was an uptick in loans overdue by more than 90 days, this could be attributed in part to the Chinese government introducing new rules for how bad debt is recognised.

The Chinese government has been cracking down on shadow banking activities in the country in the past two years as part of an effort to reduce the country’s debt. That has included stricter reporting requirements for non-performing loans.

In August, the China Banking and Insurance Regulatory Commission said non-performing loans had risen to 1.96 trillion yuan (US$283.03 billion) in the second quarter, representing the largest quarterly increase in more than a decade, according to Bloomberg.

“The asset quality issue does not seem to be deteriorating at this point,” said Heung.