Key risk to China’s shadow banking in 2017: Banks and WMPs

HONG KONG - The tough time that Chinese banks are facing, especially in terms of asset quality, is not yet being fully reflected in their profitability, says global asset manager Natixis.

Full interest rate liberalisation and increasingly low interest rates have pushed down Chinese banks’ net interest margins quite aggressively, Natixis says.

However, banks’ fee income has continued to grow on the back of their increased participation in shadow banking, particularly, through the issuance of wealth management products (WMPs).

“As of the second quarter of 2016, banks have already issued RMB26.4 trillion, contributing to 28% of total issuance. If such off-balance sheet assets were to be moved on-balance sheet, the leverage of Chinese banks (measured as asset-to-equity ratio) would increase by 15%,” Natixis says.

“Whether the trend will continue in 2017 is an open question.

“On the one hand, the demand – in the light of very low rates – is still there. On the other, both PBoC and CBRC are stepping up efforts to control the rapid growth of WMPs. Among all bank groups, JSCB is the most affected, given its leading position in the issuance of WMP.

“Overall, we believe banks will be more cautious in issuing WMPs, leaving more space for other actors to capture the growing market, especially funds and securities firms, who have seen the fastest increase in WMP issuance lately.” www.natixis.com (ATI).