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Chinese Financials Feeling the Squeeze Amid Sluggish Credit Demand

Following strong double-digit profit growth in FY2021, we expect Chinese banks will be less profitable this year as COVID-19 lockdowns continue to disrupt…

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Chinese banks are facing increasing pressure on fundamentals after weak earnings growth in the first quarter of this year, dragged down by plunging credit demand amid renewed COVID-19 waves, ongoing property sector struggles and global macroeconomic uncertainties. We think the sector will be less profitable this year, with 1Q numbers indicative of the full-year trend.

In April, the balance of yuan-denominated loans to the real economy increased by just 362 billion yuan to 200.2 trillion yuan, a 72% year-on-year contraction versus a 1.3 trillion yuan jump a year earlier. As a result, for the January-April period, the 8.7 trillion net increase in total loan balance was 5% lower than the same period in 2021.

State-owned enterprise (SOE) banks — including the “Big Four” (see Figure 1) — saw their year-on-year growth of net profits fall to mid-single digits in 1Q 2022 versus double-digits in FY 2021, which was due in part to a low base in FY 2020 (when profits fell by 2.7%). Net income margins (NIM) continued to narrow, while fee income growth slowed substantially with dampened demand for wealth management products due to weak capital market performance.

While the central government has pledged additional targeted steps to stimulate the economy, uncertainty remains as China pursues its dynamic zero-COVID strategy. We expect banks’ fundamentals to worsen in the next few quarters, driven by narrower top-line margins due to the “fee reduction and profit concession” policy and likely more material asset quality deterioration.

COVID lockdowns curb borrowing

The slowdown in loan growth was more pronounced in the retail segment, particularly consumer and personal business loans, reflecting curbed consumer demand amid China’s dynamic zero-COVID strategy.

Demand for mortgages shows no signs of meaningful recovery yet despite some easing in property sector policies, with the balance of mortgages (including residential mortgage-backed securities) contracting in April by 87.7 billion yuan month-on-month to 40 trillion. The 460 billion yuan net growth in mortgages in 1Q 2022 was far below the 1.28 trillion yuan recorded in 1Q 2021.

Corporate loan growth, meanwhile, has been relatively stable. The People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC) in late May urged local banks to extend more loans to small firms, as well as companies involved in green development, technological innovation, energy supply and water infrastructure.

Banks sticking to targets in spite of slowdown

For now, banks are not planning to revise down their full-year loan growth target of around 20 trillion yuan for the whole banking sector in spite of the sharp slowdown, as they expect demand to stabilise in the second half of 2022 when central government stimulus begins to take effect.

At the same time, however, they acknowledge that credit demand is weak, especially in the retail segment. They are also cautious about their guidance on NIM and fee income trends.

In the near term, we expect banks will try to pump up loan volumes via short-term discounted bills to meet their loan targets. The dynamic is already in play: The balance of discounted bills (which accounted for 9% of corporate loans) grew by 37% year-on-year in April to 11.2 trillion yuan.

In terms of asset quality, non-performing loans (NPL) are unlikely to rise substantially in the next few quarters, partly owing to forbearance granted to some lockdown-affected borrowers as well as property developers. In fact, the Big Four saw their NPL ratios hold steady in the first quarter in a range of 1.3% to 1.4%. That being said, weakened housing and consumption demand could point to a multi-year NPL resolution cycle in the longer term.

Investment implications

In our view, valuations for the senior credit of the SOE banks seem rich, and we see more attractive relative value in senior credit of SOE banks’ overseas subsidiaries, which enjoy strong parental support and offer decent extra yield compared to credit directly issued by their parent banks.

For a detailed picture of our outlook for China’s property sector, please read our recent blog, ‘China’s Property Sector Slump: Is Recovery on the Horizon?’.


[i] Source: People’s Bank of China (PBOC). RMB loans are part of the Aggregate Financing to the Real Economy (AFRE), which data are from the organizations including the PBC, CBIRC, CSRC, CCDC and NAFMII.

[ii] The national “fee reduction and profit concession” policy is aimed at reducing the operating costs for small and medium-sized enterprises, through measures such as cutting loan interest rates and reducing/exempting service fees.

[iii] Source: PBOC, PIMCO.

[iv] Source: PBOC

[v] Source: Bloomberg

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China Suggests It Could Maintain ‘Zero COVID’ Policy For 5 Years

China Suggests It Could Maintain ‘Zero COVID’ Policy For 5 Years

Authored by Paul Joseph Watson via Summit News,

China has suggested it will…

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China Suggests It Could Maintain 'Zero COVID' Policy For 5 Years

Authored by Paul Joseph Watson via Summit News,

China has suggested it will maintain its controversial ‘zero COVID’ policy for at least 5 years, eschewing natural immunity and guaranteeing repeated rounds of new lockdowns.

“In the next five years, Beijing will unremittingly grasp the normalization of epidemic prevention and control,” said a story published by Beijing Daily.

The article quoted Cai Qi, the Communist Party of China’s secretary in Beijing and a former mayor of the city, who said that ‘zero COVID’ approach would remain in place for 5 years.

After the story prompted alarm, reference to “five years” was removed from the piece and the hashtag related to it was censored by social media giant Weibo.

“Monday’s announcement and the subsequent amendment sparked anger and confusion among Beijing residents online,” reports the Guardian.

“Most commenters appeared unsurprised at the prospect of the system continuing for another half-decade, but few were supportive of the idea.”

Although western experts severely doubt official numbers coming out of China, Beijing claimed success in limiting COVID deaths by enforcing the policy throughout 2021.

However, this meant that China never achieved anything like herd immunity, and at one stage the Omicron variant caused more more coronavirus cases in Shanghai in four weeks than in the previous two years of the entire pandemic.

Back in May, World Health Organization Director General Tedros Adhanom Ghebreyesus suggested that China would be better off if it abandoned the policy, but Beijing refused to budge.

As we previously highlighted, the only way of enforcing a ‘zero COVID’ policy is via brutal authoritarianism.

In Shanghai, children were separated from their parents in quarantine facilities and others were left without urgent treatment like kidney dialysis.

Panic buying of food also became a common occurrence as the anger threatened to spill over into widespread civil unrest.

Former UK government COVID-19 advisor Neil Ferguson previously admitted that he thought “we couldn’t get away with” imposing Communist Chinese-style lockdowns in Europe because they were too draconian, and yet it happened anyway.

“It’s a communist one party state, we said. We couldn’t get away with it in Europe, we thought,” said Ferguson.

“And then Italy did it. And we realised we could,” he added.

*  *  *

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Tyler Durden Tue, 06/28/2022 - 18:05

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No sign of major crude oil price decline any time soon

Bullish pressure on crude oil markets doesn’t seem to be easing Crude oil prices fell last week, notching their second weekly decline in the face of…

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Bullish pressure on crude oil markets doesn’t seem to be easing

Crude oil prices fell last week, notching their second weekly decline in the face of concern that rising interest rates could push the global economy into recession.

Yet the future of crude oil still seems bullish to many. Spare capacity, or lack of it, is just one of the reasons.

The global surplus of crude production capacity in May was less than half the 2021 average, the U.S. Energy Information Administration (EIA) reported on Friday.

The EIA estimated that as of May, producers in nations not members of the Organization of Petroleum Exporting Countries (OPEC) had about 280,000 barrels per day (bpd) of surplus capacity, down sharply from 1.4 million bpd in 2021. It said 60 per cent of the May 2021 figure was from Russia, which is increasingly under sanctions related to its invasion of Ukraine.

The OPEC+ alliance of oil producers is running out of capacity to pump crude, and that includes its most significant member, Saudi Arabia, Nigerian Minister of State for Petroleum Resources Timipre Sylva told Bloomberg last week.

“Some people believe the prices to be a little bit on the high side and expect us to pump a little bit more, but at this moment there is really little additional capacity,” Sylva said in a briefing with reporters on Friday. “Even Saudi Arabia, Russia, of course, Russia, is out of the market now more or less.” Nigeria was also unable to fulfil its output obligations, added Sylva.

Recent COVID-19-related lockdowns in parts of China – the world’s largest crude importer – also played a significant role in the global oil dynamics. The lack of Chinese oil consumption due to the lockdowns helped keep the markets in a check – somewhat.

Oil prices haven’t peaked yet because Chinese demand has yet to return to normal, a United Arab Emirates official told a conference in Jordan early this month. “If we continue consuming, with the pace of consumption we have, we are nowhere near the peak because China is not back yet,” UAE Energy Minister Suhail Al-Mazrouei said. “China will come with more consumption.”

Al-Mazrouei warned that without more investment across the globe, OPEC and its allies can’t guarantee sufficient supplies of oil as demand fully recovers from the pandemic.

But the check on the Chinese crude consumption seems to be easing.

On Saturday, Beijing, a city of 21 million-plus people, announced that primary and secondary schools would resume in-person classes. And as life seemed to return to normal, the Universal Beijing Resort, which was closed for nearly two months, reopened on Saturday.

Chinese economic hub Shanghai, with a population of 28 million-plus people, also declared victory over COVID after reporting zero new local cases for the first time in two months.

The two major cities were among several places in China that implemented curbs to stop the spread of the omicron wave from March to May.

But the easing of sanctions should mean oil’s price trajectory will resume its upward march.

In the meantime, in the U.S., the Biden administration is eying tougher anti-smog requirements. According to Bloomberg, that could negatively impact drilling across parts of the Permian Basin, which straddles Texas and New Mexico and is the world’s biggest oil field.

While the world is looking for clues about what the loss of supply from Russia will mean, reports are pouring in that the ongoing political turmoil in Libya could plague its oil output throughout the year.

The return of blockades on oilfields and export terminals amid renewed political tension is depriving the market of some of Libya’s oil at a time of tight global supply, said Tsvetana Paraskova in a piece for Oilrpice.com.

And in the ongoing political push to strangle Russian energy output, the G7 was reportedly discussing a price cap on oil imports from Russia. Western countries are increasingly frustrated that their efforts to squeeze out Russian energy supplies from the markets have had the counterproductive effect of driving up the global crude price, which is leading to Russia earning more money for its war chest.

To tackle the issue, and increase pressure on Russia, U.S. Treasury Secretary Janet Yellen is proposing a price cap on Russian crude oil sales. The idea is to lift the sanction on insurance for Russian crude cargo for countries that accept buying Russian oil at an agreed maximum price. Her proposal is aimed at squeezing Russian crude out of the market as much as possible.

So the bullish pressure on crude oil markets doesn’t seem to be easing.

By Rashid Husain Syed

Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.

Courtesy of Troy Media

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WTI Extends Gains After Unexpected Crude Draw

WTI Extends Gains After Unexpected Crude Draw

Oil prices are higher today following relatively positive news from China (easing some of its…

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WTI Extends Gains After Unexpected Crude Draw

Oil prices are higher today following relatively positive news from China (easing some of its COVID quarantine restrictions), Macron-inspired doubts over the ability of Saudi Arabia and the United Arab Emirates to significantly boost output, and unrest in Ecuador and Libya helped lift prices.

“We’re in the crunch period, it’s hard to see any meaningful price relief for crude,” said John Kilduff.

There’s a lot of strength with China relaxing its Covid restrictions and starting its independent refiners, “we’re going to have another chunk of demand for crude oil,” as China relaxes its Covid-19 restrictions.

With no EIA data released last week due to a "systems issue" (they have issued a statement confirming that the data - and the newest data - will both be released tomorrow), the only guidance we have for now on the past week's inventory changes is from API...

API (last week)

  • Crude +5.607mm

  • Cushing -390k

  • Gasoline +1.216mm - first build since March

  • Distillates -1.656mm

API (this week)

  • Crude -3.799mm

  • Cushing -650k

  • Gasoline +2.852mm

  • Distillates +2.613mm

Crude stocks unexpectedly fell last week, almost erasing the major build from the week before (according to API). Gasoline stocks rose for the second straight week

Source: Bloomberg

WTI was hovering around $111.75 and pushed up to $112 after the unexpected crude draw...

Finally, we note that the tight supply situation in oil (especially European) is revealing itself in the WTI-Brent spread, grew to $6.19, the widest in almost three months.

“European demand will remain robust, especially as natural gas supplies run out, while the North American demand for crude is weakening,” said Ed Moya, senior market analyst at Oanda.

This is not good news for President Biden as prices are rising...

And his ratings are hitting record lows.

Tyler Durden Tue, 06/28/2022 - 16:37

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