China’s hurting banks brace for worst-case economic scenario

Bloomberg

Just as it looked like Beijing was starting to get a handle on its regional banking crisis, a much more severe threat is engulfing the world’s largest banking system as a deadly new virus hits the country’s economy.
The impact of the spreading coronavirus risks bringing to life the worst-case economic scenarios contained in China’s annual banking stress tests. Last year’s exercise envisaged annual economic growth slowing to as low as 4.15% — a scenario which showed that the bad loan ratio at the nation’s 30 biggest banks would rise five-fold. Analysts now say that the outbreak could send first-quarter growth to as little as 3.8%.
Banks are already suffering record loan defaults as the economy last year expanded at the slowest pace in three decades. The slump tore through the nation’s $41 trillion banking system, forcing the first bank seizure in two decades and bailouts of two key lenders.
“The banking industry is taking a big hit,” said You Chun, a Shanghai-based analyst at National Institution for Finance & Development. “The outbreak has already damaged China’s most vibrant small businesses and if it prolongs, many firms will go under and be unable to repay their loans.”
The virus outbreak comes on top of an unresolved trade dispute with the US. With many banks under-capitalised, it may put even the nation’s heavyweight lenders, often called on to support growth, at danger from the growing stress.
Economic growth is seen plummeting this quarter, even amid heavy cash injections from the central bank. Whether that stagnation will carry through to the rest of the year, depends on how quickly authorities can get a handle on the spreading virus and get its economic engines running again.
UBS Group AG estimates growth will slow to 3.8% in the first quarter from a 6% pace at the end of year and to 5.4% for 2020 if the virus is contained within three months. If the virus is more protracted, annual growth could dip below 5%, UBS said. Goldman Sachs Group Inc. also predicts a sharp slowdown in the quarter to 4%, while still predicting full-year growth at 5.5%.
Doing its own calculations based on China’s stress tests, debt rating firm S&P Global estimates that the worst-case scenario would cause bad debt to balloon by 5.6 trillion yuan ($800 billion), for a ratio of about 6.3%, adding to the already daunting 2.4 trillion yuan of non-performing loans China’s banks are sitting on.
Banks with operations concentrated in Hubei province and its capital city of Wuhan, epicenter of virus, will likely see greatest increase in problem loans.
The region had 4.6 trillion yuan of outstanding loans doled out by 160 local and foreign banks at the end of 2018, with more than half in Wuhan.

China’s inflation accelerates in January
Bloomberg

China’s consumer inflation accelerated in January on seasonally stronger demand around the Lunar New Year and rising food prices, beating economists’ forecasts.
The consumer price index rose 5.4% last month from a year earlier, following a 4.5% gain in December, the National Bureau of Statistics data said on Monday. The median forecast was for a 4.9% increase.
Factory prices started rising again after dropping in 2019, with the producer price index registering a 0.1% increase on year, compared with a 0.5% drop in December.
China’s economy was hit by the outbreak of the coronavirus in January, with city lockdowns and transportation disruptions hurting both supply and demand. The rise in CPI was mainly due to the Lunar New Year and the coronavirus epidemic, and also due to a lower base last year as the holiday was in February 2019, the NBS said.
The virus impact on the prices of industrial products was likely limited as most industrial firms were closed for at least a week and often longer.