China: Emerging risk could end up with households – ING

Chinese households are facing increasing risks from wealth management products and together, some of them are increasing leverage, which arises at a time that corporates are yet to clean up their oversupply business and related bad debts.

Key Quotes

“Total credit, in terms of total social financing, should increase 13.1% YoY and 1.6% MoM (INGF: CNY1,300bn; consensus: CNY1,280bn; prior: CNY1,220bn). RMB loans will likely be the main growth engine as shadow banking activities will continue to shrink after regulator has imposed restrictions on issuance of Negotiable Certificate of Deposits (NCD).”

“Money market funds, and related wealth management products, have packaged NCD to provide yields better than bank deposits. Low NCD issuance is creating a change in the money market. And, wealth management products are looking for alternatives to replace NCD to keep yields attractive. We expect risks embedded in these products will increase even with the same yield offered to retail customers.”

“If we look at monthly new yuan loans, which we expect to rise 30% YoY (INGF: CNY1,075bn; consensus: CNY950bn; prior: CNY826bn), household loans would surpass corporate loans in August. Back in 2015, corporates made up of an average of 66% of new yuan loans, the trend had changed to households making up an average of 57% of new yuan loans in 2016, and to 68% in July 2017 (latest).”

“Two factors have initiated this change. Increase in housing transactions has pushed up mortgages drawn by individuals. At the same time, deleveraging reform is reducing banks’ borrowing to corporates suffering from overcapacity.”

“But, corporates are will not finish deleveraging for 3-5 years. The emerging risk in China is rising household debt with corporate over-leverage only under gradual reduction.”

“And this problem is intertwined with the residential property market. Most mortgages were drawn by households in 2016-2017, a time that property prices reached their peak. When property prices start to fall there will be increasing cases of negative equity. Households’ cash flow may not be strong. It is reported that short term loans have been borrowed for down payments although this has now been banned. And so, the actual level of affordability for China mortgagors is in question.”

“All in all, households are bearing more risks.”