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China banks to lend more as nation seeks self-reliance in tech, domestic demand

Despite a lower-than-expected economic growth target for 2021, China’s bank loan growth will likely remain in the low to mid-teens this year, driven by the nation’s ambition to become more self-reliant in technology and domestic demand over the coming years, analysts say.

Building China’s own core technology, such as advanced microprocessors and cellular networks, and reducing reliance on overseas markets and supply chain are among the nation’s strategic priorities for 2021-2025, or the so-called 14th five-year plan. Meanwhile, China’s GDP growth target of at least 6% for 2021, which is lower than most economists’ estimates, indicates a policy goal of enabling economic recovery while minimizing financial risk due to excessive borrowing.

The plan, unveiled during China’s most important annual meeting of top legislative and consultative bodies that took place between March 4 and March 10, is in line with China’s “dual circulation” strategy of rebalancing growth toward domestic demand. It is a shift brought on by a rift with the U.S. that had led to, for instance, bans over the use of 5G equipment made by Huawei Technologies Co. Ltd. in the U.S., the U.K. and Sweden. The plan is also part of China’s quest to overtake the U.S. as the world’s biggest economy over the next decade.

“A less ambitious GDP target of ‘6% or above’ means the Chinese economy will continue the trajectory to move from seeking high outputs with leverage to lower but more sustainable growth,” said Gary Ng, economist, sectoral research Asia at Natixis CIB. “For banks, it implies the moment for monetary policy normalization could be on the way with lower asset growth.”

As the world’s second-largest economy continued to recover from the pandemic, total outstanding yuan loans at Chinese financial institutions rose 16.48% to a fresh record of 182.23 trillion yuan in January from a year earlier, also the first month-over-month increase since June 2020, according to data from the People’s Bank of China. Bank loan balance grew 12.82% in 2020, after expanding 12.34% in the previous year.

China’s outstanding yuan loans could grow by around 13% this year, said Iris Pang, Greater China chief economist at ING Wholesale Banking. Demand will likely be driven by technology companies, infrastructure projects and builders, she said.

Technology, infrastructure

According to the five-year plan, investment in technology research and development in China is expected to grow by an annualized average rate of 7% between 2021 and 2025, in part due to tax incentives aimed at encouraging innovation in the private sector. In 2021 alone, the central government’s funding earmarked for technology R&D will also increase by 10.5%.

Another key area of growth is infrastructure, which includes investments in transportation, energy, water projects, urban communication networks, logistics systems and revitalization of old towns.

Chinese banks would continue to play an important role of supporting funding to key areas, such as infrastructure, green energy, and small and micro enterprises to meet the 14th Five Year Plan target, said Cindy Wang, an analyst at DBS Group Research.

Meanwhile, the government is also urging large commercial banks to grow their lending to small businesses by at least 30% this year, as well as to reduce fees on vulnerable borrowers. As of 2018-end, 99.8% of China’s registered companies were those small businesses, employing 79.4% of the nation’s entire corporate workforce, according to the National Bureau of Statistics.

“If the nation’s economy continues recovering, loan demand from companies will grow, especially among small businesses, and banks will also likely to be more willing to lend to them,” ING’s Pang said.

“Inevitable” nonperformance

As banks are to lend more amid an uncertain economic outlook, their nonperforming loan ratio may hover near current levels or rise a little bit and net interest margins may remain under pressure, but systemic risk is unlikely, analysts say.

“There may be isolated risks of rising nonperforming loans related to the real estate sector, particularly among the small and medium-sized banks,” said Jing Sima, China investment strategist at BCA Research.

Despite a spate of high-profile bond defaults by state-linked companies in China in the fourth quarter of 2020, the banking sector’s aggregate NPL ratio slid to 1.84%, the lowest since 1.81% in the second quarter of 2019, according to the China Banking and Insurance Regulatory Commission. It was also down from 1.96% in the previous quarter, which was the highest level in at least six years.

The nation’s banks have aggressively cleaned up their balance sheets in 2020. In total, lenders disposed 3 trillion yuan of bad loans and wrote off as much as 1.2 trillion yuan off their balance sheets in 2020.

“NPL cleanups will last through 2022, but we think the peak intensity should pass by mid-2021,” Sima said.

As of March 11, US$1 was equivalent to 6.49 Chinese yuan.
Source: Platts

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