China’s Shanghai Composite index rose the most in two months earlier this week as the politburo of the Communist Party declared its intention to achieve economic targets by growing domestic demand on Monday.
Currently trading at 3,113.49, the politburo statements of maintaining a neutral monetary policy mildly lifted stocks of the Big Four banks in China – Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China.
Amid an increasingly tough regulatory regime, things are starting to look up for Chinese banks. In a surprise announcement on 17 April, the People’s Bank of China (PBOC) cut the reserve requirement ratio (RRR) of banks by 100 basis points, broadly lifting equities.
‘For financial markets, the latest RRR cut is a positive for equities, as it shows policymakers are focusing on providing liquidity, as well as continuing to restrict overall credit growth,’ noted Ken Peng and Catherine Cheung, investment strategists at Citi Private Bank.
On average, Chinese banks keep 15-17% of deposits at the PBOC as required reserves. The cut, expected to release RMB 1300 billion ($206.2 billion) of liquidity, would also allow banks to repay their outstanding medium-term lending facilities, the strategists said.
Meanwhile, industry watchers are also expecting a boost in sentiment from better regulatory oversight. In 2017, China’s regulators significantly tightened policy over shadow financing activities, including off-balance-sheet wealth management products and unregulated structured products, drying up credit available outside the traditional banking system.
To further tighten regulation, Chinese authorities announced the merging of the national banking and insurance regulators at the National People’s Congress in March. The new Banking and Insurance Regulatory Commission was officially unveiled on 8 April.
‘Last year authorities awoke to the risk inherent to some retail insurance products, particularly those that relied upon implicit state guarantees or exhibited mismatched duration,’ noted Brock Silvers, managing director of Shanghai-based private equity firm Kaiyuan Capital.
‘This spate of activity represents both good and bad news for China’s burgeoning private wealth management sector,’ he told Citywire Asia.
The executive stated that the regulatory clampdown could drive Chinese investors from risky insurance products to more standardised offerings as well as create expanded opportunities within structured products for responsible private banks.
S&P Global Ratings considers the reform as having positive credit implications because it eliminates regulatory loopholes among the two regulators and reduces regulatory arbitrage.
‘We expect the streamlined agencies to help drive China's deleveraging campaign by better reining in those financial institutions that have driven a massive expansion of shadow banking activities in recent years,’ said S&P Global Ratings credit analyst Liang Yu.
However, she noted that while the megabanks in China have adapted well to a tougher regulatory regime, with net profits up 4% in 2017, smaller banks have had a tougher time adjusting to reforms.
While Chinese banks can also look forward to the relaxation of foreign ownership limits on financial firms in coming years, there is the issue of capital controls, said Silvers.
‘Beijing seems prepared to open domestic markets to greater foreign investment, but the integration of domestic Chinese capital into global investment flows, which promises to revolutionize the domestic private wealth management industry, seems to remain as remote as ever,’ he said.