Moody's: China makes significant progress in deleveraging

China (A1 stable) made considerable progress in decelerating the growth of financial leverage in the economy in 2017 and the authorities are likely to maintain their tight policy stance in 2018 because the containment of risks in the financial system is a key priority, said Moody's Investors Service recently.

"Our conclusion on this progress is based on banking system statistics released by the People's Bank of China and the China Banking Regulatory Commission for 2017," said Nicholas Zhu, Moody's Vice President and Senior Analyst.

In terms of specifics, asset growth for China's banks has slowed from regulatory tightening of shadow banking and interbank activities, while the weakest rate of growth was seen among joint-stock commercial banks, some of which reported asset shrinkage, Moody’s observed. On the other hand, city commercial banks saw double-digit asset growth, the credit rating agency added.

Challenges still facing regional banks

Despite subdued broad credit growth, those regional banks— city and rural commercial banks, and some joint-stock commercial banks—that operate in provinces with accelerating loan growth could still face challenges in managing asset quality and capitalization, said Moody’s.

Asset quality in general has stabilized in line with the sustained expansion in the macro-economy while the non-performing loan ratio for Chinese banks was flat at 1.74% throughout 2017, the credit rating firm pointed out.

Meanwhile, other leading indicators for loan quality, such as the special-mention loan ratio, indicates continued stabilization in asset quality in 2018, in line with latest GDP growth reports, which point to moderate but sustained growth in the macro economy, Zhu noted.

Capitalization has been supported by moderating asset growth, as demonstrated by the slower growth of risk-weighted assets. Tier 2 capital expanded faster than other types of capital, according to Moody’s.

Profitability has experienced pressure from the tighter regulations to curb shadow banking and from higher funding costs associated with tighter liquidity and, as a result, is likely to stay under stress, the firm observed.

While liquidity has been tight, especially for the smaller banks and nonbank financial institutions, the central bank has maintained broad funding market stability by injecting longer-term funds and promoting deleveraging, it added.