Chinese banks turn Japanese

Via Capital Economics:

The outlook for China’s banks is going from bad to worse. Pressure on the banking system has increased during the past year even though economic activity has recovered. And with a renewed slowdown now on the cards, the health of China’s banks looks set to deteriorate further in the coming years. Chinese banks have been doing better on some measures lately. In particular, earnings growth in recent quarters has been strong relative to the past couple of years. The problem is that this pick-up in profit growth has been driven by more rapid bank balance sheet expansion during the recent policy easing cycle rather than any improvement in asset quality. (See Chart 1.)

Admittedly, growth in non-performing loans (NPLs) has slowed during the past year, at least on the official figures. Some of this is genuine. After all, there has been an improvement in corporate earnings growth in recent quarters. But most observers, including ourselves, believe that the actual level of NPLs is much higher than banks admit to. And even on the official figures, the slowdown in NPL accumulation simply brings it in line with growth in overall bank loans and so the NPL ratio has, at best, stabilised. (See Chart 2.)