Foreign news bulletins have been featuring grim footage of Chinese hospitals packed with coronavirus patients. Nearly half the passengers on recent flights from China to Milan have tested positive. The Chinese economy is correspondingly sickly itself. Banks will bear a heavy financial burden as a result.
Data show that Beijing’s abrupt reversal of its restrictive zero-Covid policies is causing damage worse than widespread lockdowns. China’s factory activity shrank at its sharpest pace in nearly three years in December. The non-manufacturing index, measuring construction and services sector activity, declined to 41.6 from 46.7 the previous month. That was well below the 50-point mark separating contraction and growth.
Chinese health authorities estimate that 250mn people, or about 18 per cent of the population, contracted the virus in the first few weeks of December. The real percentage must be closer to figures reported by Italian health officials monitoring flights from Beijing.
That points to dire labour shortages and supply chain disruption. Manufacturing will continue slowing and corporate financial distress will rise.
The real estate sector is already in deep trouble. Property prices and sales volumes have been slumping amid a consumer demand slowdown. The retail and leisure sectors are exposed too. They could usually expect to make $110bn in sales over the Lunar New Year holidays. This year, infections are the only surge that matters.
Outside real estate, most big businesses have the resilience to weather the storm. Smaller companies are more vulnerable. Chinese authorities will expect big banks to support struggling enterprises with soft loans and outright rescues. Local developers and regional banks are among previous beneficiaries.
The non-performing loans of Chinese banks already stood at a record Rmb3tn ($436bn) by the middle of last year. Beijing asked big lenders to step in to support the housing market with another Rmb1.9tn last year. Other sectors are increasingly leveraged. China’s debt as a percentage of GDP hit a historic record in the first half.
Shares of the largest banks, including Bank of China, Agricultural Bank of China and China Construction Bank have dropped in the past six months. The biggest, Industrial and Commercial Bank of China, is down a tenth and trades at 0.4 times tangible book — less than half the price of foreign peers such as HSBC. China’s economic recovery will come at the expense of local lenders and their shareholders.
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