(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

 

HONG KONG  - Chinese lenders are looking forward to getting the wrong kind of help. The country’s largest banks took a hit in the June quarter; Industrial and Commercial Bank of China, the world’s largest by assets, saw profit fall 25% per Breakingviews calculations. The central bank is letting interest rates rise to cool speculation, which should ease lenders’ pain - at the struggling private sector’s expense. Beijing’s rush to normalise policy could backfire.

The four biggest Chinese state banks, including ICBC, Agricultural Bank of China, China Construction Bank and Bank of China, had too pleasant a first quarter even as the virus raged. Regulators noticed. Under pressure to prepare for pain, the four have raised loan-loss provisions 61% in the second quarter, according to data from the China International Capital Corp. That depressed second quarter profitability, shrinking net interest margins.

The outlook could be better thanks to the People’s Bank of China. The central bank has put policy easing on hold since April, helping benchmark interest rates on traded instruments gradually rise. That will naturally help bank profit margins but hurt private sector borrowers still waiting for domestic demand to recover.

An analysis by S&P Global points to a stark contrast between the recovery in residential property sales, a sign monetary easing has fuelled speculation, and the stubborn weakness of retail sales, which suggests stimulus hasn’t rebuilt consumer confidence. Strength in online food shopping largely reflects price inflation caused by pests and floods. The recovery in investment has come overwhelmingly from state-owned companies, which rose 14% in July year-on-year compared to 3% from private firms.

The PBOC proposes to manage the risk of rising credit costs via window guidance, called “precision drip irrigation”. The aim is to channel cheap finance to manufacturing and small companies but not speculative mortgages. There has been some progress adjusting bank loan structures, a report by Gavekal Dragonomics shows, but it’s unclear whether this can actually offset a wider rise in the cost of credit. If it doesn’t, what’s good for the banks in the short term will hurt them later as the economy sputters.

 

CONTEXT NEWS

- China's five largest state-owned banks, namely Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of Communications and Bank of China, all reported their biggest profit declines in at least ten years in the second quarter of the year, with non-performing loans rising and margins shrinking.

 

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Una Galani and Sharon Lam) ((pete.sweeney@thomsonreuters.com; Reuters Messaging: pete.sweeney.thomsonreuters.com@reuters.net))