As the first major economy that achieved recovery after the outbreak of the pandemic, China is expecting around 8% growth in 2021
China’s economic growth went down by 6.8% in the first quarter of 2020 amid the COVID-19 outbreak, the lockdown of the whole city of Wuhan and nationwide travel restriction. The containment of the outbreak as well as production and work resumption in China have been successful. The economic growth in the second quarter returned to positive reaching 3.2%, making China the first major economy that achieved growth after the outbreak. The third quarter’s 4.9% growth further consolidated the bounce back of the economy. The country is on track to be the only economy with a larger gross domestic product (GDP) with an expected growth rate of 2.1% in 2020. If the trend continues, the economy is forecast to grow in 2021 at a range of 7.7% to 8.9% or even higher, coming from a low base in 2020.
Since the People’s Bank of China (PBOC), the country’s central bank, introduced the loan prime rate (LPR) new quotation mechanism in August 2019, the industry’s average loan interest rate has declined. Overall, one-year LPR dropped 40 basis points (bps) accumulatively from 4.25% in August 2019 to 3.85% in July 2020. While the return on asset (ROA) side is under pressure, the acute competition in debit sides has constantly pushed up the industry’s average deposit cost of fund, and as a result, the narrowing of the interest rate spread between deposit and loan credit has become one of the major challenges for domestic banks. As of June 2020, the total assets of China’s banking industry reached RMB 301.52 trillion ($46.68 trillion), which grew 9.8% year-on-year (YoY), and total liability increased by 9.6% to RMB 276.22 trillion ($42.76 trillion).
Another huge challenge is the global impact of the COVID-19 pandemic coupled with the US-China trade conflict which add pressure on the economy. Most banks have increased the provision level for non-performing assets (NPAs) and accrued asset impairment loss to control risks. As a result, the growth rate of revenue and net profit began to differentiate. As of June 2020, the industry’s average non-performing loan (NPL) ratio increased to 2.1%, 8 bps higher than the end of 2019 with coverage ratio decreased by 4%.
Despite the unprecedented headwinds, some positive market factors have also brought rare opportunities and a window period for transformation and upgrade to China’s banking industry. Since the first half of the year, PBOC has reduced the deposit-reserve ratio three times. It released RMB 1.75 trillion ($260.6 billion) liquidity effectively reducing bank capital cost. PBOC has actively addressed the new challenges that arose amid the pandemic by implementing prudent monetary policies that are more flexible and appropriate.
Consequently, the growth rate of the broad measure of money (M2) supply and social financing scale is significantly higher than that of last year. According to the initial statistics of the central bank, accumulative social financing increment for the first half of 2020 reached RMB 20.83 trillion ($3.1 trillion), up by RMB 6.22 trillion ($926 billion) YoY. As of the end of June, the M2 amounted to RMB 213.49 trillion ($31.78 trillion), up by 11.1% YoY which resulted in deposit growth on balance sheet of the banking system. Semi-annual reports of mainstream banks indicated that individual deposits of the China Construction Bank (CCB) and Ping An Bank both achieved double-digit growth compared to the end of 2019.
The approval of banks’ wealth management subsidiaries has been accelerated. This year, the preparation for the establishment of three wealth management subsidiaries has been approved increasing the total number to 20. The profitability of the banking sector is expected to rebound in 2021.
In the latest AB500 ranking, Industrial and Commercial Bank of China (ICBC), CCB, and Agricultural Bank of China ranked among the top three by total assets with the overall ranking of 1, 2 and 3, respectively. In terms of profitability, China Merchants Bank (CMB) holds the top position among the top 10 largest banks with return on equity (ROE) and return on assets (ROA) of 15.7% and 1.3%, respectively. It was followed by CCB and Industrial Bank.
Looking forward to 2021, challenges remain such as the rising tension with the US on trade, technology, and geopolitics, and uncertainty raised by COVID-19 may not be easy to wave off. Chinese officials have rolled out a raft of measures including more fiscal spending, tax relief and cuts in lending rates and banks’ reserve requirements to revive growth and support employment. With the steady rebound of its economic growth in the past two quarters, it is estimated that the economy will keep the momentum in at least the first half of 2021.