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Asia-PacificJuly 6 2020

China’s banks look to restoring health post-coronavirus

Pandemic has sent shockwaves through China and brought economic growth to a standstill for the first time in decades. As business restarts, what role will banks play in rebooting the country’s economy?
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The arrival of coronavirus has derailed China’s long-running economic expansionary wave. After 40 years of consecutive growth, the country has seen its economy grind to a halt. At the China’s National People’s Congress in May, which had been delayed three months due to the pandemic, premier Li Keqiang declined to provide a gross domestic product (GDP) forecast for 2020, citing the uncertainty in global markets. 

Despite the reluctance around forecasting, the levels of decline were still being made public. The National Bureau of Statistics announced in April that first-quarter GDP had dropped 6.8% year-on-year. The last time a year-on-year fall was reported was in 1976. While the global markets are cited as the cause for concern, China is also facing significant uncertainty domestically. 

China took a strong approach to dealing with coronavirus, implementing lockdown on January 23 in Wuhan, Hubei province. Schools remained closed as part of an extended Lunar New Year holiday, and public transport ceased. All travel in and out of the city of 11 million was stopped. Only one member of each household was allowed out to shop for essential items, which put the familiarity with mobile technology seen across China to good use, as they had to scan a QR code to indicate they were negative for the virus. These steps meant the outbreak was concentrated in Wuhan, the point of origin, and the Hubei province, with 80% of the country’s cases to date confirmed in the location. 

As lockdown eased, China has faced the new problem of the rest of the world shutting down and closing borders as the pandemic spread. During the first five months of 2020, foreign trade in goods fell by 4.9% year-on-year, according to the General Administration of Customs. During May, exports rose by 1.4% year-on-year, but imports fell by 12.7%, which resulted in a trade surplus of Rmb442.75bn ($62.5bn). 

Regulators bring support 

To slow the rate of decline, the regulators have thrown everything they have at keeping the economy buoyant. To bolster banks through the pandemic, on March 16, the central bank, the People’s Bank of China (PBOC), reduced required reserve ratios (RRR), implementing a one percentage point cut to eligible joint-stock commercial banks. This aimed to release up to Rmb550bn of liquidity. Subsequently, on April 15 and May 15, RRR was cut by 0.5 percentage points for a second and third time for rural commercial banks and rural credit co-operatives, which released a further Rmb400bn in liquidity. 

The PBOC stepped up with measures that included Rmb300bn in loans for epidemic prevention and Rmb500bn to resume work and production. The re-loan and rediscounting quota was increased by Rmb1000bn to provide funds to small and medium-sized banks, with a one-year fixed interest rate of 2.5%. 

To assist small and medium-sized enterprises (SMEs), a joint initiative was introduced by China Banking and Insurance Regulatory Commission (CBIRC), the PBOC, the National Development and Reform Commission, the Ministry of Industry and Information Technology, and the Ministry of Finance, to temporarily postpone repayments of loans and interest for those who had suffered with the virus. For loans due after January 25, SMEs could apply to have the repayment term extended to June 30, while banks could use their discretion on providing assistance to companies with good prospects for additional extensions. 

The authorities had expectations that the banks would do their part in supporting companies through the pandemic. Hong Qi, the outgoing chairman of China Minsheng Bank (CMBC), says: “Banks were encouraged to mobilise all forces and integrate internal resources to provide greater support to the prevention and control of the epidemic, the resumption of work and production of enterprises, and the spring ploughing of farmers.”

Virus response  

In an environment that changed almost overnight, the banks needed to pivot to offering services to support their clients through the darkest days of the coronavirus, especially those on the frontline of tackling the pandemic.  

“In February, we launched our epidemic fighter loans, a product featuring preferential interest rates offered to healthcare professionals and public servants engaged in the combat against Covid-19,” explains Li Fuan, chairman of China Bohai Bank. “We believe that these supportive measures will have only a temporary and immaterial impact on our liquidity position, the maturity profile of our loan portfolio and our asset quality, given their limited applicability and targeted implementation.” 

Jin Yu, chairman of Bank of Shanghai, says the bank established an express channel so it took just two days to open an account and obtain a loan related to epidemic prevention and disease control. “As at the end of April, more than 10,000 clients had been exempted from paying interest and more than 2000 clients’ credit records had been recovered,” Mr Jin adds. 

Providing support to the front line included banks looking at their clients, picking out those that provided services essential to tackling the virus and backing companies in the areas hardest hit by the pandemic. 

“From February 1, 2020, until the end of the epidemic, the bank has provided and will keep on providing favourable funds transfer pricing on new loans to the enterprises in the white list, as well as the new corporate loans and small business loans in Hubei province and Zhejiang province,” says CMBC’s Mr Hong. 

Boost for SMEs 

More widely, the Chinese economy has needed a liquidity boost, and providing considerable support for SMEs has been a priority. Keeping SMEs afloat is vital to recovery, as they make up around 90% of the country’s enterprises, and account for about 60% of GDP. Giving them the necessary support required a fast reworking of products and services. 

“We launched Bohai business loans, an online working capital loan product tailored for micro and small enterprises in January, which has been well-received by our customers during Covid-19,” says Mr Li of China Bohai Bank. “We also set up green approval channels to expedite the credit approval process for enterprises engaged in the production of medical and anti-epidemic supplies, to make sure that their needs for credit support are met with top priority.” 

In order to provide adequate support, banks had to considerably increase the level of funds they were allocating to SMEs. Liu Jin, president of China Everbright Bank (CEB), says: “We increased our credit support to enterprises affected by the epidemic and allocated an amount of special credit of Rmb20bn, of which Rmb2bn were targeted at SMEs in Wuhan. In the meantime, we asked our business unit not to reduce or break off loans to SMEs.” 

Meanwhile, Industrial and Commercial Bank of China has introduced a range of loan renewal and repayment adjustment options, which have been used by more than 14,000 SMEs to date. Rate reductions were offered to assist some SMEs, with those in Hubei province having interest rates reduced further still. 

To ensure the flow of lending to smaller companies, in early June it was announced the central bank would allocate Rmb1000bn to buy back loans made by smaller lenders to SMEs. The PBOC will buy the loans on a quarterly basis from qualifying banks. These banks need to buy back the loans after a year, and the PBOC has stated it will not bear the credit risk should the loans become non-performing. 

Providing support means not only mean extending financing but also adapting existing rules to deal with the new environment. Zhang Jinliang, chairman of Postal Savings Bank of China (PSBC), says: “For SMEs, the bank flexibly adjusted its policies to lower the credit extension threshold. It also adopted off-site measures, such as remote investigation and interviews, as well as video contract signing to make it more convenient for SMEs to access funds needed to resume production.” 

Specialist support 

For other banks, providing support meant playing to their strengths and experience with specific areas of the economy. Li Xu, chairman of Shanghai Rural Commercial Bank (SRCB), says: “In terms of serving agriculture, rural areas and farmers, SRCB co-operated with the Shanghai municipal agricultural and rural committee to establish a rapid response mechanism for financing local agricultural products supply with a special credit line of Rmb3bn, effectively protecting the ‘shopping basket’ of citizens in Shanghai.” 

The move provided considerable support and, as of the end of April 2020, SRCB had granted 103 loans for financing agricultural product supply, exceeding Rmb1.6bn in total. 

The banks collaborated with other organisations to target support at those most in need and at the start of their careers. “SRCB established the joint working mechanism with the Shanghai Communist Youth League Committee and the Shanghai Youth Federation, providing total credit limits of Rmb3bn with preferential interest rate and fast loan approvals in order to support young entrepreneurs and start-ups in their efforts to resume work and production against the epidemic,” Mr Xu adds. 

The maturity of digital banking in China made it easier for banks to pivot towards offering assistance through these channels, reaching customers that may have otherwise struggled to access assistance. “We developed more targeted online products to help industries hit by the epidemic,” CEB’s Mr Liu says. “For example, we launched the Sunshine e-catering loan, a credit facility to mitigate the pressure on the catering business. And Everbright Cloud Fee Payments enabled millions of people to make utility payments, while keeping physically distanced.” 

For the mobile-only lenders, the size of the loans taken out by their users is low, with the average size taken out by MYBank’s customers standing at Rmb35,000 at the end of 2019. Nevertheless, some companies have experienced issues that required the bank’s support. 

Jin Xiaolong, president of MYBank, says: “Some SMEs have encountered operational difficulties and thus affected their ability to repay loans. However, the overall quality of SME loans between February and March remained predominantly healthy.” 

Meanwhile, WeBank has stepped up by providing a payment holiday scheme for its small and micro business customers. “WeBank reduced their financial burdens by extending repayment of the February instalment to March, benefiting 123,000 small and micro enterprises with a total remaining balance of Rmb2.42bn,” says Nanqing Li, president of WeBank. “A three-month extension of payment period was also offered, benefiting 34,000 SMEs with a total remaining balance of over Rmb10bn.”  

NPL challenge 

Even though the banks and regulators have stepped forward to support companies, whether this will be enough to prevent the rate of non-performing loans (NPLs) spiralling still lies in the balance. 

Some banks are optimistic, as they came into the pandemic with a low percentage of NPLs. CEB's Mr Liu says: “During 2019, the NPL ratio was 1.56%, down by 0.03 percentage points year-on-year. Risk resistance capability was further enhanced with a provision coverage ratio of 181.62%, an increase of 5.46 percentage points year-on-year.” 

A spokesperson for Ping An Bank says it had not experienced increased NPLs in the first quarter. “As of the end of March 2020, the proportion of loans overdue for more than 60 days, the proportion of loans overdue for more than 90 days and the proportion of special mentions loans were all lower than that of the end of the previous year. The NPL ratio was the same as that at the end of last year. Deviations of loans overdue for more than 60 days and loans overdue for more than 90 days are both less than 1.0. Taken together, the asset quality risk is well controlled.”  

PSBC’s Mr Zhang says at the end of the first quarter of 2020, the asset quality of the bank had remained largely unchanged. “The NPL ratio was 0.86%, which was the same as that at the previous year end; the ratio of special-mention loans was 0.56%, 0.10 percentage points lower than that at the prior year-end; the overdue loan ratio was 0.90%, 0.13 percentage points lower than at the end of the previous year,” he says. 

However, there are concerns that it is still too early to tell what kind of impact the economic downturn and the rise in lending will have. Geoffrey Choi, Asia-Pacific financial services assurance leader at EY, says: “If you look at the key financial indicators like NPLs to the end of March, you will notice the increase has not become apparent. We expect the impact to be seen in the second and third quarter of 2020.” 

Yulia Wan, vice-president senior analyst, financial institutions group at Moody's Investors Service, adds: “With the virus starting to significantly impact the economy in late January, it will take beyond the 60 to 90 days overdue period for loans to be considered as NPLs. This means that the hit from Covid-19 has not been fully reflected in the numbers yet.” 

The CBIRC has reported the NPL ratio of commercial banks increased by 1.91% in the first quarter of 2020. Mr Choi cautions against believing this is the height of the problem. “I think it is more important to monitor the second quarter results. The number of NPL ratios will continue to climb as the challenges that companies face are reflected.” 

At Natixis, chief economist for Asia-Pacific Alicia Garcia Herrero points out the NPL ratio has increased from 1.86% in the fourth quarter of 2019 to 1.91% in the first quarter of 2020, while the special-mention loan ratio surged from 2.91% to 2.97% for the same time period. “Therefore, it is clear the asset quality has been impacted to some extent,” she says. “However, the quick loan expansion may mask the increase in NPLs.” 

Furthermore, Fitch has stated it expects to see the NPL ratios of its rated banks to increase to 3%, up from around 1.5% during 2020. The split of NPLs depending on bank size has also increased, disproportionately impacting the smaller banks. 

The shape of recovery 

Just as banks had to think on their feet to provide support for customers in the first days of the pandemic, they may now need to look for new ways to operate in order to get through the next few difficult months.  

Harry Hu, senior director, financial institutions ratings at S&P Global Ratings, suggests banks should bite the bullet in dealing with their problems. “If banks were to report all stressed loans this year, it could help to get through the most difficult part in one year and reduce the impact on next year’s figures. However, in doing so, the hit on these banks’ capital accumulation would restrict their ability to ‘lend’ further support to the real economy,” he says. 

Banks looking to increase their capital may have to start issuing bonds for the first time. “Since January 2019 we’ve seen the regulators encourage the banks to issue perpetual bonds to replenish them,” EY’s Mr Choi says. “Bank of China was the first to issue a perpetual bond, and subsequently most of the larger banks have issued their own. What we are seeing now is the smaller commercial and rural banks are starting to issue perpetual bonds to replenish capital.” 

However, the rate of change in China is largely dependent on the global outlook. Grace Wu, senior director of financial institutions at Fitch Ratings, says: “We expect profitability pressure from weaker loan demand and asset yields, given broader policy directives on loan concessions and rate reductions to support borrowers. Loan impairment will also increase, as China is expected to experience the weakest GDP growth in recent history, and Chinese banks have not gone through a full credit cycle since their restructuring in the early 2000s.” 

Furthermore, Ms Wu cites Fitch estimates that China’s GDP growth will fall to 0.7% in 2020, before recovering sharply to 7.9% in 2021. “We expect sectors such as transportation, hospitality and entertainment, as well as retailers that are mostly small businesses, to be most impacted by the coronavirus. Retail loans, including residential mortgages, credit card receivables and consumer lending, will also suffer as unemployment rises,” she adds. 

As China’s population recovers from the impact of the pandemic on their health and wellbeing, there is some way to go before the country starts to see sizeable annual increases in GDP, and it seems possible there will be some further shocks to the economy along the way. 

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Kimberley Long is the Asia editor at The Banker. She joined from Euromoney, where she spent four years as transaction services editor. She has a BA in English Language and Literature from the University of Liverpool, and an MA in Print Journalism from the University of Sheffield. Between degrees she spent a year teaching English in Japan as part of the JET Programme.
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