Resilience and realignment: Opportunities and risks in China’s banking sector

05 September 2024 (10 min read)

KEY POINTS

China’s banking system is facing some significant challenges from the country’s beleaguered property market and local government debt. In addition, while banks’ assets have grown in recent years, asset quality has deteriorated

Unlike overseas, Chinese banks’ mortgage exposure appears relatively small. But their exposure to property developers and local government financing vehicles present greater risks, with smaller banks particularly vulnerable

We believe a systemic banking crisis should be avoided but local government entanglement in the credit process poses risks

As a result, banks are shifting their focus towards high-tech manufacturing and services to enhance their profitability

China's economy has been grappling with significant challenges in recent years – primarily an unprecedented property downturn set against the backdrop of a broader economic slowdown. Additionally, the issue of local government debt, continues to exert pressure on the economy. Banks, often seen as the barometer of an economy, are experiencing tremendous strain from these challenges. Following our recent research analysing property market developments, in this note we analyse the banking sector’s overall health by examining its asset growth, asset quality and exposure to troubled economic sectors — specifically, the property market and local government debt. We will also explore China’s banks’ potential future.

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