Early this year, market pundits pointed to China’s economic recovery as a catalyst for world equities. Beijing has decided to give that flagging hope some life by allowing local banks to cut deposit rates. That could help lift their sluggish profitability.
On Monday, news that more local lenders will do so prompted some of the sharpest gains for bank shares in almost a decade. That will distract investors from the current crackdown on the Chinese banking sector — the third largest by market weighting.
Even the largest state-owned lenders, including Bank of China and China Citic Bank, hit their daily trading limit of 10 per cent on the day. The fact that larger banks are following smaller peers in cutting deposit rates hints at a lasting trend. But it is too early to celebrate.
The largest lenders are state-owned. The industry is strictly regulated. They must limit themselves to conservative investments despite holding enormous deposits, which grew by $2.6tn last year alone.
Chinese banks have struggled to maintain profitability. Policymakers pushed state lenders to provide cheap loans to small businesses and home buyers. Non-performing loans, which hit a record of Rmb3tn ($434bn) last year, are growing. The four largest banks have a Rmb3.7tn shortfall on total loss-absorbing capital. Net interest margins shrank last year as earnings fell.
Shares in Bank of China and Agricultural Bank of China are up more than a third this year. They still trade well below regional peers at about a third of tangible book value. This reflects wariness about regulatory investigations into more than 20 executives in the financial sector. A broader clampdown on leverage continues, restricting lending.
When crackdowns on the local tech groups started in late 2020, sector profit margins were robust. What followed was a years-long decline in their shares. What Beijing gives with one hand, it can take away with the other. Chinese banks remain a risky choice.
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