Emerging opportunities

The Chinese banking sector is becoming a promising investment possibility, writes Joey Wong

For years, some market-watchers have voiced concerns about the health of China’s banks and questionable sales of wealth-management products (WMPs). These investment vehicles offer attractive yields and imply backing by the issuing banks, yet their portfolios are not always transparent and banks frequently do not record them on their balance sheets – giving rise to fears of systemic risk.

When the research team of Allianz Global Investors recently talked to branch bank managers in China about these issues, we found that demand for WMPs remains strong. But there is growing consumer interest in a new, more transparent product. There is also ample evidence of a healthy mortgage market that supports our generally constructive perspective on these banks.

Most of our sources said WMP sales trended up between December 2016 and February 2017 – by an average of 11% – as other investment options, such as stocks and housing, remained unattractive. Loan quotas are expected to stay unchanged this year due to government efforts to curb the overheated housing market and general concerns about China’s business environment. Our sources expect mortgage loans in 2017 to remain the main source of loan business, while property-backed consumer loans should see significant growth.

Two-fifths of our sources expect the loan default rate to remain flat in 2017, but half expect it to trend higher. Still, most believe the overall loan default rate will stay low, and we did not find any sign of default risk increasing in recent months.

Our study also found that net-asset-value-type WMPs have gained traction among banks and customers, which Research Analyst Helen Ye found interesting: “NAV-type products remove the implicit-guarantee obligation from banks and require them to educate customers about their own risk exposure.”

The findings about muted loan growth and continued reliance on mortgages as the primary source of new loans are similarly encouraging. “Mortgages are considered a healthy and lucrative business for the banking sector,” said Ms Ye. “These results run counter to the market’s concerns about continued excessive credit growth in China’s economy and are supportive of our investment perspective on China’s banks.”

Emerging opportunities

The Chinese banking sector is becoming a promising investment possibility, writes Joey Wong

Emerging opportunities

The Chinese banking sector is becoming a promising investment possibility, writes Joey Wong

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