China is beckoning an increasing number of yield-hungry international investors

Attracted by a host of positives, while presenting unique risks given the ongoing trade war, language barriers and obstructive government policies.

In recent times, China has seen slowing economic growth, anaemic real estate sector and low interest rate. The low interest rate has narrowed interest rate spread, directly affecting banks’ net interest income. However, they are proactively adjusting their revenue structure and focusing on other businesses such as wealth management services, which could offset the negative impact of the low interest and ensure decent growth. Meanwhile, driven by the steady recovery of China’s economy, the asset management business should perform better, relieving the pressure on banks’ profitability.

Banks’ real estate-related NPL ratio increased in 1H, and pressures from real estate policies are expected to remain, forcing banks to optimise their asset quality in 4Q21. However, the overall risk from real estate could be limited. Nowadays all large domestic banks actively comply with instructions from the government. Banks have promised to implement stricter audit standards for new projects. For the problems banks are already exposed to, they would evaluate and recognise the impairment in advance to minimise risks.

Last year was a challenging year for the banking industry. China’s economy, however, has continued to grow steadily. As of now, there are no obvious signs of inherent systemic risks in the banking industry. Major banks still have better risk indicators than required, ensuring sufficient buffers for unforeseen risks.

The Chinese government has eased regulations related to asset management and is making its capital markets accessible to a large number of firms in its effort to lower the pressure on banks. However, the pandemic and complex international relations have increased banks’ business risks, leading us to expect that the banks will continue to maintain provisioning buffers.