Chinese banks:Initial reading from the speech of CBRC Head

Further curbs on shadow banking: There are two new regulations that arein draft. One is targeting banks’ wealth management products (WMP),whose AUM has grown by 24% yoy to Rmb29tr as end of 2016. The otherone is a comprehensive, coordinated regulation on asset managementbusinesses of various financial institutions, which is jointly drafted byfinancial regulators (see our previous comment Link). Guo stressed toprioritize containing financial risk and improve transparency of financialproducts. Key regulatory directions are requiring sufficient provision andcapital charge and directing credits into real economy.

    Asset quality: Guo emphasized systemic risk in banking system remainscontrollable, with NPL ratio down 2bps yoy in 2016 to 1.91%. To relieveasset quality pressure, CBRC is pushing forward debt-to-equity swap(DES) and credit committees. This round of DES has amounted toRmb430bn as of February 2017. There is no specified quota for DES (seeour comments Link). In addition, China has set up more than 12k creditorcommittees in 2016 for troubled companies, involving Rmb14.9trn loans,or 21% of total corporate loans. Banks in the committees cannot withdrawlending to the target corporate on its own discretion.

    DB view

    Overall we see Guo’s appointment as long-term positive for China’sfinancial stability given his intension to contain shadow banking risks andfinancial leverage. He has been seen by the market as a “reformist”,especially during 2011-13 when he chaired CSRC and pushed forwardcapital market liberalization.

    In near term, we expect CBRC to tighten shadow banking and toaccelerate the implementation. This should lead to slower credit growth.

    In the process, we see joint-stock and city/rural banks more vulnerable totighter regulation due to their reliance on wholesale funding (30-35% ofliabilities) and elevated shadow banking exposure (20-25% of assets).

    We recommend buying ICBC/CMB while selling MSB/CNCB in H-shareamid China’s financial deleveraging. Further tightening in shadow bankingrepresents catalyst for wider valuation gap between the two groups.

    We do not see DES and credit committees as effective ways ofdeleveraging corporate sector, if employed by themselves. With potentialgovernment intervention, they may be used to ever-green corporate debt.