In the framework of the stress test conducted by the Central Bank of China in the first half of 2019, was tested 30 medium and large banks. In the baseline scenario, suggesting that GDP growth will fall to 5.3%, 9 out of 30 major banks collapsed and said that their capital adequacy ratio decreased to 13.47% from 14.43%. In the worst case scenario that assumes that GDP growth will fall to 4.15%, 17 of 30 major banks passed the test. Needless to say, the consequences for the Chinese financial system’s volume of $41 trillion of troubled Bank assets worth more than $20 trillion will be terrible.
Why talk about this now? According to many estimates, the wall street, as a result of slowing the pandemic coronavirus, China’s economic growth will fall sharply. Some banks, such as JPMorgan, expect GDP growth of only 1% in the first quarter, suggesting that the epidemic will decrease in the next few weeks. Otherwise, the China’s GDP growth in the first quarter may be negative.
This is a big problem, because, if you believe stress-test the IBO in 2019, more than half of Chinese banks will not stand, if the GDP will fall to 4.15%. One can only imagine what will happen to the Chinese banks if the GDP will go into negative territory.
Or one of the direct consequences of the reduction in GDP is that the share of bad loans in the 30 largest banks in the country will grow 5 times, flooding the country with bad debts at trillions, opening a tsunami of Bank defaults.
of Course, Chinese banks are already suffering from record default rates, as the economy in the past year developed its slowest pace in the last 30 years. The recession has hit the country’s banking system of $41 trillion, which not only led to the first outflow of deposits of banks over the last 20 years after the nationalization of Baoshang Bank, but to bale out the Bank of Jinzhou, Bank of Nanjing, Henan Yichuan Rural Commercial Bank Yingkou Coastal Bank.
But all is florets in comparison with what BUchildren in the future.
“the Banking industry has suffered a great loss. The outbreak has already caused damage to the most active SMEs in China. If it will last, many companies will go bankrupt and not be able to repay their loans,” said analyst Yu Chun from the National Institute of Finance and development.
the Market is still driven by the hope that the Chinese economy will avoid the worst outcome. However, the main purchasers of aluminium in China have already canceled contracts with some of the world’s largest copper producers, citing force majeure. And, most likely, they are not the only ones to take such a step. It is unlikely for Chinese banks will not affect the situation with coronavirus, as millions of businesses would freeze their operations, refusing to pay coupons or repay debts. This means that Chinese banks — enough capitalized after a two-year trade war with the United States — will suffer major damage from the upcoming operating crisis and reduction of liquidity. Beijing will be forced to make a choice between bale-out of hundreds of banks or their bankruptcy.
of Course, JPMorgan is not alone in his worst GDP forecast: according to UBS, growth will slow to 3.8% in the first quarter from 6% at the end of the year, in 2020 it will reach 5.4 per cent if the spread of the coronavirus will continue for 3 months. If the situation with coronavirus will be delayed, annual growth could fall below 5%. Goldman Sachs predicts a sharp slowdown in the quarter to 4% and annual growth at 5.5%.
After making his own calculations based on stress tests of China, Bloomberg reported that, according to estimates, the S&P in the worst case, the amount of bad debts will increase to 5.6 trillion yuan ($800 billion), the ratio will be 6.3%, in addition to the already huge volumes of bad debts of 2.4 trillion yuan in the Bank of China.
S&P expects banks whose operations are concentrated in Hubei and its capital Wuhan, the epicenter of the pandemic and the region most affected by the virus, probablypush with the greatest rise in bad loans. At the end of 2018, the bad debt of the region was 4.6 trillion yuan, they belong to 160 domestic and foreign banks, with more than half of them are located in Wuhan.
the Problem is that Beijing recently “advised” the largest banks to perform their civic duty, helping millions of small businesses, issuing more cheap credit, prolonging the debts and refusing of charges, which will only worsen the situation with bad debts.
as China struggles with the consequences of the pandemic, and officials are aiming to reduce concern about the impact on the banking sector. On Friday, Zhou Liang, Vice Chairman of the Chinese Commission on regulation of banking and insurance, said that the potential increase in bad loans is a “managed process”. However, he did not explain on what level of bad loans will become unmanageable. Last year alone, Chinese lenders have eliminated bad debts 3 trillion yuan, he added, noting that the share of bad loans of small businesses in China amounted to 3,22%.
In a recent nationwide survey, about 30% of respondents said that they expect declining revenues by more than 50% this year due to the outbreak of coronavirus, 85% said they are unable to conduct operations for more than 3 months as cash now available.
In any case, nothing but the impact of the pandemic does not threaten neither the Chinese banks nor small businesses, if the spread of the coronavirus will not increase in the coming weeks.
Before that, banks had no choice but to waste money for nothing, which aggravated their already precarious situation. “Social stability has the primary importance for the Chinese authorities. So the banks asked for help to cope with the burden of this outbreak of the virus,” said S & P analysts led by tan Minh in a recent report.
the Situation is worsening: while the banks desperately need the cashx money, Beijing is telling them to reduce the interest on existing loans. According to Bloomberg, most state banks have agreed to reduce by 0.5 p. p. borrowing costs for companies, stopped operations due to the virus, however, the Council of State now requires that small businesses pay no more than 1.6% due to state subsidies. And even if a cheaper financing will help the economy in General, rates below 5% means that banks do not earn enough money to cover your financing costs.
This leads to even more unpleasant situations than the SARS epidemic, or the global financial crisis of 2008: what distinguishes the current situation from the situation in 2008 or 2003, is the absence of Bank capital, which would support aggressive stimulation of lending, said grace Wu, head of Greater China Banks at Fitch Ratings in Hong Kong. “The Chinese banks are no opportunities to replenish capital, as in recent years their profits have been reduced.”
And even the government in Beijing can’t magically create trillions of new money to rescue the banking system without catastrophic consequences for an economy that already suffers from the highest inflation for 9 years.
this saw investors who every day are taking a more pessimistic position relative to the Chinese banks. State lenders the Big four-which together control assets amounting to more than $14 trillion, is currently traded on average 0.6 times their forecast book value, which is close to the record low level. This means that the market for banking assets by $6 trillion worth nothing!
Bank stocks reacted accordingly. According to Bloomberg, shares of the credit giant China, ICBC, with assets of more than $4 trillion, declined 11% since the beginning of the year. A shares China Construction Bank Corp. in 2020 fell by 7.6%.
However, the worst is yet to VPEready because an unexpected epidemic of coronavirus was their most serious challenge. The longer it lasts, the lower the chance of a happy outcome. “The stability of the banking system of China could be subjected to serious tests,” — analysts said S & P.