SHANGHAI
Chinese banks’ asset-quality pressures will increase the more that public-health measures to curb the spread of Covid-19 cases disrupt economic activity, said Fitch Ratings.
Pandemic control measures in several regions, including Shanghai, have curtailed economic activity, and Fitch has revised its China growth forecast for 2022 to 4.3%, from 4.8% previously. “Our forecast remains subject to downside risk if containment measures fail to bring new Covid-19 outbreaks under control quickly or if the easing of current restrictions is delayed, given our assumption that China will strictly adhere to a “dynamic zero” policy to manage the pandemic until 2023,” said the report.
The control measures have dampened business activities and loan demand since March. Overall system loan growth between end-2021 and end-April 2022 was slow at 4.7%, and was mainly accounted for by corporate loans related to infrastructure and green loans, as well as short-term discounted bills. Residential mortgage loans increased by only 1%, while consumption loans shrank by 4% over the same period.
“We expect more policy loosening to support the economy, such as further reductions in the loan prime rate (a 15bp cut to the five-year loan prime rate was announced on 20 May) and required reserve ratios, as well as loan repayment holidays for micro and small enterprise (MSE) borrowers. The People’s Bank of China also announced a 20bp cut to minimum mortgage rates on 15 May 2022 for first-home buyers, which should help lift buyer sentiment,” said Fitch Ratings.
The control measures have increased near-term pressures on profitability for Chinese companies across various sectors. Fitch views the engineering and construction (E&C) sector as being particularly vulnerable to liquidity strains if further outbreaks of Covid-19 cause serious and prolonged disruption in 2022. “Order books for the sector appear robust, in our view, and at the aggregate level we do not expect financing to pose major issues for project implementation,” said Fitch.
However, activity has been subdued, most likely as a result of operational challenges posed by the control measures, and cash flow has consequently not been released, said Fitch.
Fitch said that Chinese E&C firms typically collect only a small portion of a project’s revenue as down payment, and must come up with most financing on their own before project completion, when the remaining funds are paid. Smaller E&C firms, especially privately owned ones, are also more exposed to the property sector, as they often lack the ability to secure infrastructure project contracts, which usually require special qualifications.
China’s property market continues to struggle, although we expect improved sales momentum in 2H22, said the report.
