Chinese Banks

Chinese Banks

China's five biggest banks posted Q1 numbers that some commentators relate to an economic recovery improving margins and asset quality.

Industrial & Commercial Bank of China Ltd. posted a 4 percent increase in quarterly profit.  China Construction Bank Corp., Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co. also reported moderate growth.

Combined profits at the Big Five, which together control more than a third of China's $40 trillion in banking assets, will probably increase by high single digits this year after growing 4 percent last year. Rising global interest rates are boosting margins and the banks are benefiting from President Xi's crackdown on shadow financing, - the combined outstanding volume of trust lending, entrusted loans and bank acceptances  climbed to 27.8 trillion yuan last year- which is forcing smaller banks to turn to big lenders for funding. (In January, top bank regulator Guo Shuqing emphasised in public that there is a need to "dismantle" the shadow banking sector and "suppress" household leverage).

Some are waging that earnings of the big banks will withstand the deleveraging campaign have helped their stock prices outperform smaller rivals this year. With shares of the five banks now trading at an average 0.76 times their estimated book value, they do not appear too dear.

However, there are plenty of worries out there: By the end of 2016, total borrowing exploded to about 260 percent of the size of the economy, up from 162 percent in 2008. China accumulated its record debt pile after the global financial crisis, when it pumped credit into the economy. Many say the risks to financial stability are mounting. Kyle Bass and Jim Chanos have been vocal in identifying risk. The IMF warned that China might eventually suffer a hard adjustment unless it addresses its indebtedness. And both S&P Global Ratings and Moodys cut China's sovereign credit rating in 2017 due to debt risk. BIS has highlighted a monster credit-to-GDP gap.

In the worst case, the government might take over some liabilities and sell them to distressed debt operators.