China's financial institutions face higher risk-to-asset quality as an economic downturn appears inevitable amid the country's pandemic-mitigation policies, according to S&P Global Ratings.
An estimated 40% of the real estate builders in China are in some sort of financial trouble, and the actual stressed property development loans are likely higher than the official 2.6% nonperforming loans ratio, Ratings analysts said on a July 5 call. The asset quality of small businesses would also be heavily impacted by COVID-19 lockdowns.
"The gloomy economic outlook will likely continue unless the government offers more support like it did in 2020," said Harry Hu, senior director for financial institutions ratings. The government may even let some banks collapse, especially the smaller lenders with corporate governance issues, if authorities think the impact on the overall banking system will be manageable, Hu said.
The economic slowdown and the drag from lockdowns to quell COVID-19 infections is likely to slow economic growth in China. While major global central banks, led by the U.S. Federal Reserve, have embarked on a steep rate hike cycle to tamp down on inflation, China remains focused on supporting its economy with easing measures. The world's second-biggest economy grew 4.8% year over year in the first quarter, lagging behind the official 2022 growth target of about 5.5%.
China's zero-COVID policy has subdued consumption, weakened employment and hurt supply chains, dampening the effects of monetary easing. With deteriorating fiscal balance sheets of local and regional governments and sluggish property sales hitting developers' already weak cash flows, Ratings revised down China's growth expectation in 2022 to 3.3% from 4.2% previously.
China could eventually overcome the COVID-19 challenges and still have the reasonably structured growth potential, said Louis Kuijs, Asia-Pacific chief economist at S&P Global Ratings, but the strength of growth is coming down and it is "not likely for China to see an average pace of 6% growth for more than a short period of time."