Chinese banks wait for signal on direction

EDITOR'S note:

China's economy has been regaining some steam in recent months after growth was hit by weak external demand and domestic tightening in the previous three quarters. As we embrace 2013, Shanghai Daily now runs a year-end series to track policy and market changes as well as their influence on different sectors for next year.

The first piece is on China's banking sector, which has achieved healthy and rapid growth but faces challenges ahead, including risks lurking in shadow banking and fierce competition escalated by China's interest rate liberation.

Chinese banks are at a crossroads, waiting for a traffic signal from the country's new leadership.

The economic landscape at this junction certainly looks more daunting for Chinese lenders. The quality of assets is coming under scrutiny.

The repercussions of the eurozone debt crisis continue to roil global trade, weakening export markets for Chinese goods and undercutting the creditworthiness of many Chinese export firms.

In the past five years, double-digit increases in house prices have been the key driver of strong loan demand in China, according to the International Monetary Fund. Government intervention to rein in property speculation has slowed that market.

The State Administration of Taxation announced earlier that China would expand its property tax pilot project beyond Shanghai and Chongqing - a clear sign of ongoing property curbs that may lead to lower valuations of bank assets.

In addition to worsening asset quality, lenders are likely to face more margin pressure as the government begins to liberalize interest rates, the IMF said.

Standard & Poor's also said it expects interest rate cuts by the People's Bank of China, the central bank, will strain banks' profits in 2013 more than they did in 2012.

Still, despite all the challenges and hurdles, the big Chinese lenders posted rather stunning results in the third quarter.

Lenders, including the locally incorporated arms of foreign banks, made a combined net income of 981 billion yuan (US$15.6 billion) in the first nine months of this year, a fifth higher than the same period in 2011, according to the China Banking Regulatory Commission.

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