China banks: Medium-term structural challenges

- China Financials Forum: Addressing medium-term structural challenges, opportunities "We hosted the Caixin China Financials Development Forum featuring policy makers such as NDRC/PBOC/CBRC/CIRC on Sept. 9, and the GS/Gao Hua China Financials Corporate Day on Sept. 10 to discuss interest/exchange rate reform, LGP loan risks, property tightening, insurance sector growth / regulation, rural finance and land reform outlook, and consumer protection."
- Interest rate reform: A med.-term challenge, not an imminent risk "Speakers highlighted the need to accelerate interest rate and exchange rate reform in the light of current negative real deposit rates. Key takeaways: 1) interest rate reform is a medium-term challenge for banks, but likely a gradual process rather than an imminent risk; 2) some NIM pressure on big corporates and mortgage loans is inevitable, but should be mitigated by: SME/other corporate loan/deposit spread rise; China’s already relatively low NIM vs. EM countries (e.g. Brazil, Indonesia, India, Turkey); and China banks’ low P/B vs. current ROE, which has partly discounted NIM decline risks, in our view."
- LGP loans: Not a systemic risk, but long-tailed on fiscal reform "Speakers underlined the rich resources, assets, and revenue collection rights of many Chinese local governments, but pointed out potential NPLs from highly leveraged LGPs. Municipal debt issuance will not happen for a while."
- Property tightening: Commercial property less a risk for now "Speakers believe commercial property risk is not a big issue so far given its early stage of sector development, low portion of rental vs. ownership, and property tax applied to reduce speculation, etc."
- Rural finance: Rural housing land reform to be trialled "Speakers believe rural finance should be viable given the high pricing power if risks are well managed. We believe rural housing land reform (piloted in rich areas) could have a significant positive impact on farmers’ personal wealth, consumption and financing activities."
- Insurance: Carefully managed pricing deregulation process "Speakers are positive on the growth potential of insurance. They believe regulators will maintain tight control on solvency margins, and life product pricing deregulation will be carefully managed to avoid any negative impact."

GoldmanSachs China Banks 20100914

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