Financial strains related to real estate in China are increasingly evident in local banks. By December 2023, non-performing loans (NPLs) had risen by about 30% compared to the previous year. This impedes banks’ ability to grow their lending, possibly hindering China’s economic recovery. Hong Kong investors are shying away from trading Chinese local bank stocks due to concerns over the banks’ exposure to real estate woes.
The rise in NPLs is confirmed by 2023 fiscal reports of 27 Hong Kong-listed large and mid-sized banks, with NPLs totaling 106.8 billion yuan, a 27% increase from the previous year. The average NPL ratio for real estate loans reached 6.5%, indicating a surge in bad loans.
Analysis shows a worsening situation for local banks in economically challenged regions, such as the northeastern provinces, with Jiutai Rural Commercial Bank experiencing a 37% increase in real estate-related NPLs.
Government responses have been conflicted, as it is difficult to stimulate the economy while also maintaining stability in the banking sector. The government introduced a mechanism for coordination of real estate financing, potentially aggravating financial risks by pushing banks to lend out funds to whitelisted projects. Meanwhile, concerns have arisen over banks’ ability to handle bad loans in the face of shrinking net interest margins (NIMs). By December 2023, NIMs had reached a historic low of 1.69%, prompting speculation that the People’s Bank of China (PBOC) may cut interest rates in the future to stimulate demand. At the same time, a further reduction in interest rates could lead to further strain on banks’ resources and ability to manage bad loans.
Source: Nikkei Chinese, April 9, 2024
https://zh.cn.nikkei.com/china/ceconomy/55288-2024-04-09-05-00-00.html