May 7, 2020 / 4:38 AM / in 22 days

Breakingviews - China’s big banks socially distance from economy

A logo of Bank of China is seen next to skyscrapers at the Pudong financial area in Shanghai, China, May 11, 2015. REUTERS/Aly Song

HONG KONG (Reuters Breakingviews) - Big Chinese banks are a bit too socially distant from their own virus-stricken economy. Industrial and Commercial Bank of China – the world’s largest lender by assets – and its hulking peers grew their bottom lines in the first quarter even as the country’s GDP plunged 6.8%. Such rude health suggests they haven’t extended enough credit to private businesses in need, which may capture Beijing’s attention.

It always has been better to be one of the so-called Big Four. ICBC, Bank of China, Agricultural Bank of China and China Construction Bank hog up the best state-owned clients, who are well-stocked with collateral and insulated from default. Their collective 72 trillion yuan ($10.2 trillion) deposit pool, nearly 40% of China’s total, allows them to earn easy money lending short-term funds to smaller financial institutions, too, while bullying local bond and foreign exchange markets.

That makes it easier to understand how they might be insulated from China’s first formally recorded recession; their biggest customers are, too. Thus, even as HSBC’s profit, tumbled 48% from the first three months a year earlier, for example, China Construction Bank’s rose 5% and its non-performing loan ratio stayed flat at a modest 1.4%. Given that financial regulators are encouraging banks to roll over loans, defaults may hold steady. The top tier is so buffered that S&P Global Ratings reckons Chinese banks might actually reduce their loan loss ratios by 10 percentage points, to 190%.

Something will have to give. Small Chinese businesses were hurting even before Covid-19 struck, and the Big Four were under orders to help out because they account for most of the country’s jobs. The message does not appear to have gotten through. Instead, the Big Four appear to be channelling funds to state-backed employers with low headcounts - which technically count as small business loans - plus real estate speculators and financial institutions arbitraging interest rates. In the meantime, smaller banks are left holding the riskiest portfolios. They’re starting to implode; Bank of Gansu is the latest in a string seeking bailouts. ICBC and its ilk may soon be forced to take a chance at greater exposure.

Breakingviews

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