China’s banks are edging towards their “Japanification moment”, as years of yielding margins to support the economy have “left the system thin on profitability and more exposed to credit shocks”, according to a new report by S&P Global Ratings.
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Japanification is characterised by a prolonged period of low growth and weak profitability, similar to the state of Japan’s economy after the country’s asset bubble burst in the early 1990s.
While other banking systems had weathered ultra-low rates by diversifying revenue and cutting costs, “Chinese lenders may have fewer such options, leaving them more reliant on lowering credit losses to stay profitable”, the report warned.
For China’s central bank, “safeguarding growth and social stability will take priority over bank profits”, S&P credit analyst Ming Tan said in the report.
To stimulate growth, Beijing has cut both the one-year and five-year prime loan rates to historic lows, which further squeezed mainland banks’ profitability.
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At the same time, banks were directed to lend to weak borrowers and offer concessions, from the pandemic-era fee reduction policy for small businesses to lower charges levied on funds and insurance products for consumers, according to the report.