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Bejing may be hurting its own banks by forcing them to drop risky assets

As banks in China release their financial report cards this month, investors can expect clearer signs on how well banks in the world’s second-largest economy are holding up against a government-led clamp down on swelling debt.

The health of the Chinese banking sector is closely-watched as lenders hold more than 90 percent of total financial assets in the world’s second-largest economy, according to Reuters. But the banks’ abilities to control risks were brought into question when growing indebtedness led regulators to intervene on fears of instability breeding turmoil.

With the banks’ earnings reports for first half 2017 scheduled to begin Friday, analysts said more attention will be paid to financial indicators that show the amount of risky assets the lenders hold and their exposure to the “shadow banking” sector.

Shadow banking is a broad category of banking-like services from non-traditional players; it can include loans from non-financial companies as well as investment products. It is outside the bounds of normal banking regulation, so it largely goes unregulated.

As lenders in China release their financial report cards this month, investors can expect clearer signs on how well banks in the world’s second-largest economy are holding up against a government-led clamp down on swelling debt.

The health of the Chinese banking sector is closely-watched as lenders hold more than 90 percent of total financial assets in the world’s second-largest economy, according to Reuters. But the banks’ abilities to control risks were brought into question when growing indebtedness led regulators to intervene on fears of instability breeding turmoil.

With the banks’ earnings reports for first half 2017 scheduled to begin Friday, analysts said more attention will be paid to financial indicators that show the amount of risky assets the lenders hold and their exposure to the “shadow banking” sector.

Shadow banking is a broad category of banking-like services from non-traditional players; it can include loans from non-financial companies as well as investment products. It is outside the bounds of normal banking regulation, so it largely goes unregulated.

The big five banks are Industrial and Commercial Bank of China, China Construction Bank, Bank of China, Agricultural Bank of China and Bank of Communications, which have assets among the largest in the world.

“Credit risk is still the main risk faced by commercial banks this year,” Guan said. “Compared to the first six months, China’s banking industry will face more challenges from the overall business environment. Economic growth is expected to slow down in the second half of the year, monetary and regulatory policies will be more stringent.”

Not-so-bad early indicators?

Several indicators released in the past weeks appear to show that China’s efforts to contain financial risks have made some progress.

The proportion of bad loans for all Chinese banks was 1.99 percent at the end of May, down 0.16 percentage points from the same period last year, Reuters reported. China’s National Bureau of Statistics also reported that state-owned enterprises recorded profit growth of 24.3 percent in the first half of 2017, which should improve banks’ asset quality and lending profitability, Deutsche Bank analysts wrote in a note.

On Monday, Moody’s Investors Service said progress by the Chinese authorities to rein in credit growth and enhance oversight of shadow banking is encouraging. The ratings agency last month said it no longer held a “negative” view on China’s banking system as risks appeared to have eased.

Over the last two years, many Chinese banks have struggled to record even 1 percent growth in profits due to soaring bad debt and loan defaults. Now, the banks’ fortunes, especially those of the big five, may improve in 2017, some analysts said.

“I think there’s probably some upward bias to earnings this year. For the big banks at least, I think margins should improve, loan growth is better and provisions should come down,” Matthew Phan, senior analyst at CreditSights, told CNBC.

Still, he added, he was concerned that “the asset quality recovery will be short and shallow.”

“The property market looks like it could slow, and this will lead the entire economy down, leading to fresh concerns about bank [non-performing loans]. Though I think that’s a 2018 question, not a 2017 question.”

Source: CNBC

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