Founder Evidente. Top rated quantitative analyst, Evidente

Sam Ferraro

Founder Evidente. Top rated quantitative analyst

Evidente

Evidente is an independent financial education firm that delivers innovative financial advice to wholesale investors, including active long only funds, hedge funds, pension funds, and sovereign wealth funds, in Australia and globally.  Drawing on academic research in asset pricing, behavioural finance and portfolio construction, Evidente provides wholesale investors with commercial solutions to stock selection and asset allocation decisions across equities and other asset classes.

Thematic (Sector/Industry)

China Financials / Thematic (Sector/Industry)

<p>In its recently released half yearly Financial Stability Review, the Reserve Bank of Australia examined the state of China's financial system.  In this post, Evidente draws on the RBA's analysis which highlights that although China's commercial banking sector has robust profitability and loss absorbing capital ratios that are above the regulatory minimum, a number of key vulnerabilities have emerged.  </p><ul><li>Non-performing loans have increased in recent years as the economy has slowed, particularly for small and medium sized banks.  Given the lags associated with reporting, there is a strong prospect of further deterioration in asset quality.</li><li>The prospect of renewed depreciation of the RMB would put further strain on the real estate sector, which has significant foreign currency debt but earns little in the way of foreign currency revenues.</li><li>Growth in lending by the measured shadow banking sector has slowed in recent years, but shadow banks still account for no less than one-fifth of the stock of debt in China.  The sector poses systemic risks due to their more lax lending standards which stems from the fact that shadow banks are not subject to capital and provisioning requirements, and the fact that it attracts riskier borrowers that don't have access to credit through the formal banking system.</li><li>Chinese banks have low ratios of common equity tier 1 capital to risk weighted assets by the standards of comparably large emerging market commercial banks.  The spectre of further deterioration in asset quality suggests that China's banks will need to lift their capital ratios. </li></ul>

In its recently released half yearly Financial Stability Review, the Reserve Bank of Australia examined the state of China's financial system.  In this post, Evidente draws on the RBA's analysis which highlights that although China's commercial banking sector has robust profitability and loss absorbing capital ratios that are above the regulatory minimum, a number of key vulnerabilities have emerged.  Non-performing loans have increased in recent years as the economy has slowed, particularly for small and medium sized banks.  Given the lags associated with reporting, there is a strong prospect of further deterioration in asset quality.The prospect of renewed depreciation of the RMB would put further strain on the real estate sector, which has significant foreign currency debt but earns little in the way of foreign currency revenues.Growth in lending by the measured shadow banking sector has slowed in recent years, but shadow banks still account for no less than one-fifth of the stock of debt in China.  The sector poses systemic risks due to their more lax lending standards which stems from the fact that shadow banks are not subject to capital and provisioning requirements, and the fact that it attracts riskier borrowers that don't have access to credit through the formal banking system.Chinese banks have low ratios of common equity tier 1 capital to risk weighted assets by the standards of comparably large emerging market commercial banks.  The spectre of further deterioration in asset quality suggests that China's banks will need to lift their capital ratios. 

Haitong Securities Co Ltd (A) (600837 CH)

Chongqing Rural Commercial Bank (3618 HK)

Shanghai Pudong Development Bank Co. (600000 CH)

China International Capital Corporation (3908 HK)

China Financial Services Holdings (2980 HK)

China Merchants Securities Co Ltd (A) (600999 CH)

China Pacific Insurance (Group) Co., (601601 CH)

Flying Financial Service Holdings (8030 HK)

China Huirong Financial Holdings (1290 HK)

Changjiang Securities Company (000783 CH)

China Merchants Securities Co Ltd (H) (6099 HK)

Shanghai Stock Exchange Composite Index (SHCOMP INDEX)

Can China's Financial System Cope with Further Deterioration in Asset Quality?