Loan quality polarised between China's east and west

The impaired loan ratio varies between China’s east and west regions and among its different industries.

The asset quality of the big Chinese banks is not as badly eroded by bad loans as expected thanks to their broad exposure to the country’s different regions and sectors, J.P. Morgan said.

The non-performing loan (NPL) ratio is various greatly among China’s east and west areas and different major industries.

“The east coast has a lot of pain in terms of rising NPLs,” said Josh Klaczek, head of Asia Financial Services at the bank. “Impaired loans in the area increased 12% in the second half of 2011 and 4% in the first half of this year.”

By contrast, NPLs in China’s western region decreased 5% in the second half of 2011 and 18% in the first half of this year, which suggests the banks’ asset quality in the region is improving.

“This will continue for a while especially for state-owned banks with a broad base nationwide. The central and west region takes 30% to 35% of total loans, while the east takes 65% to 70%. Big banks benefit from their western exposure,” he said.

The west also has a more robust credit growth of 15% to 20% plus, whereas that growth is around 7% to 12% in the east.

Over the last decade, the central and west region of China has enjoyed many favourable government policies designed to allow the underdeveloped hinterland to catch up with the affluent east coast.

And the Beijing’s favourable policies often landed in the form of large construction projects. The infrastructure and utilities sectors, which are booming in the central and west, embrace the lowest NPL.

The government-orchestrated fixed asset investment fuelled by generous stimulus capital has allowed builders in the country enjoy good cashflow. Construction companies -- especially those engaged with government-related infrastructures -- contribute to 8% of the country’s total NPL. Companies involved in utilities take up 15%, according to J.P. Morgan.

Meanwhile, the export-depended manufacturing and trade businesses, of which 90% are located in the east, suffer the worst, the bank said.

Manufacturers, although borrowing 19% of the total banking loans in China, contribute 35% of the impaired loans in the country’s banking system. The retail and wholesale trade, taking 9% of the total bank loans, accounts for 15% of NPL.

HSBC’s PMI (purchasing manager index) on China’s manufacturing industry climbed to an eight-month high in October to 49.5, but it was still below 50, which suggested a contraction in the industry.

Although exports outlook remains challenging, analysts expect a policy easing to boost domestic demand and counterbalance the shrinking number of orders from the overseas.

Moreover, despite the interest rate cut, state-owned banks still managed to get a premium charge on loans they issued due to a limited banking-lending quota.

“The better-than-expected asset quality and margins are the usual formula for over-performance,” said Klaczek.

The large Chinese banks will see better interest margins than smaller ones. The big lenders also have “well beyond expected” core capital ratios. J.P. Morgan overweights ICBC and CCB, and votes neutral to BOC and ABC.

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