Economic Watch: China's banking industry seeks to shield real economy from epidemic shock

Net profits of China's commercial banks tumbled in the first half of 2020, an uncommon decline analysts say echoed the country's efforts to wield financial instruments to sustain the real economy amid mounting pressure due to COVID-19.

In the Jan.-June period, the country's commercial banks saw net profits slide 9.4 percent year on year to 1 trillion yuan (about 144.93 billion U.S. dollars) with average return on assets at 0.83 percent, down 0.15 percentage points from the end of the first quarter, data by the China Banking and Insurance Regulatory Commission (CBIRC) showed.

"It is very rare in recent years," said Dong Ximiao, a researcher with the National Institution for Finance and Development. "But the fall was not due to worsening operational capability of commercial banks, but the result of intensified endeavor to share profits with the real economy."

As the epidemic kept weighing on the world's second largest economy, China has taken a slew of measures to lower financing costs for enterprises in the real economy and help them tide over difficulties.

In the first half, the country's new yuan-denominated loans expanded to 12.09 trillion yuan, up 2.42 trillion yuan year on year, official data showed.

Such loans mainly went to industries including infrastructure, technology and innovation, small and micro businesses, said Guo Shuqing, chairman of the CBIRC, adding that the newly-added loans in the manufacturing sector set a record this year, on par with the total number of the past four years.

"Monetary and financial policies have played an important role in the country's positive economic growth in the second quarter," Guo said.

Other preferential policies to relieve firms' strains include cutting interest rates on loans and deferring the repayment of capital and interest. In the first seven months of this year, these measures saved businesses more than 870 billion yuan.

In the second half of the year, inclusive service for small and micro firms will be given priority, while efforts will also be made to advance the development of the capital market and direct financing, said Guo.

As China introduces a raft of measures to reform the capital market, the proportion of direct financing is expected to rise to 25 percent in aggregate financing to the real economy in the future, which will in turn provide the banking sector with more business opportunities and new growth drivers of integrated financial operations, said a recent report by the People's Bank of China.

Noting that China's financial industry has been operating steadily with generally controllable risks, Guo said that attention should be paid to some potential risks including mounting non-performing assets.

Such cautiousness has been echoed by international institutions such as the International Monetary Fund, which, in its recent issue of World Economic Outlook, also urged policymakers to keep an eye on financial fragility and maintain the system's stability while continuing to support the real economy.

"Credit risk is a particular threat as clients come under increased liquidity pressures," said a report by global consultancy firm Boston Consulting Group, adding that deteriorating credit quality could increase pressure on profitability and regulatory capital.

In 2020, China's banking industry is expected to dispose of 3.4 trillion yuan worth of non-performing loans, a rise of 2.3 trillion yuan from last year, and the amount will continue to increase as some loans are delayed, according to Guo.

Facing challenges from asset quality, commercial banks across the country have raised loan loss reserve fund to 5 trillion yuan as of the end of second quarter, with provision coverage ratio at 182.4 percent.

"The level was far from the 150-percent regulatory red line, indicating relatively strong risk compensation capability of domestic banking industry," said Wen Bin, chief analyst at China Minsheng Bank.

Commercial banks should enhance efforts for the disposal of bad assets and intensify control on the production of such assets, according to Zhen Xinwei, a researcher with the International Monetary Institute of Renmin University.

Zhen suggested that all levels of government should maintain a sound financial ecology while adhering to market-oriented and law-based principles.