China Financial Institutions Monitor – 2Q21

Macroeconomic Recovery was Uneven; Financial Supervision Highlighted Risk Prevention; Financial Institutions’ Performance Diverged Amid Covid-19

- The gap between PPI and CPI reached a record high in 2Q21. Recovery of production and consumption diverged

- Macro policy changed from counter-cyclical to cross-cyclical. Monetary policy returned to neutral, focused more on people’s livelihood, green industry and inclusive finance

- The balance of green credit in China increased rapidly. Financial institutions will play an important role in ESG practices

- Financial supervision was strengthened further, which can be concluded as “strict control on incremental risk and mitigation on existing risk”. Growth of real-estate loans declined, and disposal pressure on real-estate NPL increased

- Net profit of banks changed to positive, and asset quality improved. Financial leasing companies reduced risk appetite, and net profit growth of consumer finance companies slumped

Fitch Bohua

Uneven Economic Recovery, Macro Policy Changed to Cross-Cyclical

Vaccines Distributed Unevenly Globally; High Vaccination Rates in Developed Countries

China, the US and India underwent the highest total vaccination doses of 896 million, 318 million and 262 million, respectively, as of 23 June 2021, according to the World Health Organization. Europe and the Americas are clearly ahead in terms of the number of vaccinations per 100 population, with China close to those of Germany, France and Canada.

However, vaccination is not evenly distributed around the world. Total vaccinations and vaccination per 100 people in poor areas are low, due to limitations on vaccine distribution and storage. In addition, the emergence and spread of the Delta variant heighten the uncertainty surrounding the global pandemic.

China has rich experience in managing epidemics, and is quick to respond to occasional outbreaks. Confirmed cases occur sporadically, although a large-scale outbreak is unlikely to recur. These highly effective measures have helped China's recovery.

China' s PMI Expansionary; PPI-CPI Gap Historical High

The National Statistics Office published the latest PMI on 30 June 2021. The composite, manufacturing, and non-manufacturing PMIs were52.9%, 50.9%, and 53.5%, respectively. The PMI remains in an expansionary range, but moderate compared with May 2021.

The gap between PPI and CPI widened further in 2021, reaching a record high. On the one hand, the recovery of the global economy, loose monetary policy, and speculation in financial markets have contributed to the sustained rise in commodity prices, which has led to rising PPIs. The PPI rose 9 % in May, to a 13-year high.

On the other hand, the CPI was muted, due to slumping hog prices which were dragged down by surging supply as breeders rushed to sell hogs amid the spread of African swine fever mutations. The May CPI was 1.3 %, with the core CPI up 0.9 % yoy.

These figures suggest the economy has limited inflationary pressure, and the macroeconomic recovery is uneven, with production and consumption divided. If the demand side recovery falls behind market expectations, such as the total retail sales of consumer goods, profitability of the downstream and midstream enterprises may suffer from the sharp rise in raw material prices.

China' s Export Expectations Divide


China' s exports maintained a high growth in 1H21, due mainly to strong external demand from the overseas markets’ recovery from the pandemic. China' s exports amounted to US $263.92 billion, a significant increase of 23.37% over $193.61 billion in 2019.

However, market expectations for Chinese exports diverged for 2H21. On the one hand, the PMI new export orders, a leading economic indicator, has decreased for three consecutive months to 48.1% in June. It may be a harbinger of future weak export growth. As global vaccinations and pandemic prevention unfold, emerging markets’ resumption may accelerate. Such an acceleration could have a negative impact on China's exports.

Meanwhile, several potential factors will have a positive impact on China' s exports. The economic recovery in the US and Europe is continuing. South Korea, considered as a bellwether on global exports, is still enjoying high growth in its exports, whose external demand may remain highly for some time. The emergence and spread of virus mutations in several countries has slowed the progress of returning to work in emerging markets.

Macro Policy Changed from Counter-Cyclical to Cross-Cyclical, Focused on Structural Adjustment

It was first proposed at the meeting of the Political Bureau of the CPC Central Committee in July 2020 that cross-cyclical design and adjustment of macro policy should be improved, and that the long-run equilibrium between stable growth and risk-prevention should be achieved. With the Chinese economy returning to normal, the macro economy is changing from “counter-cyclical adjustment” to “cross-cyclical adjustment”.

Monetary policy returned to neutral with the reduction of pressure of ensuring stable growth and maintaining employment. From the amount of open market operations, we can see that the Chinese Central Bank (PBOC) has maintained accurate control of monetary policy. The net money supply kept to RMB10 billion.

The only increase in money supply was in June 2021, to keep money markets stable during the quarter end. The reverse repo rate and the MLF rate have continuously remained unchanged to guide market rates to fluctuate within a narrow policy range. Meanwhile, the PBOC strengthened its support of inclusive finance and green fields.

In terms of fiscal policy, Chinese general public budget revenue reached 9.64 trillion RMB in the first five months of 2021 and the two-year compound annual growth rate (CAGR) was 3.57%, close to the 2019 level of 2019 prior to Covid-19. The two-year CAGR of tax revenue was 3.94%, which was the key driver of fiscal revenue growth. The two-year CAGR of the general public budget expenditure in the first five months of 2021 was 0.28%, which grew at a lower pace than in the first two months of 2021 and had only achieved 37.4% of the total annual budget. The two-year CAGR of fiscal expenditure in the social security category was 6.45%, while the two-year CAGR of fiscal expenditure in the infrastructure category (including urban and rural construction and traffic transportation) was still below -10%.

Fitch Bohua believes that macro policy in 2021 is concentrating more on adjustment and optimization of economic structure compared with the counter-cyclical policy in 2020. As regards economic stability, the macro economy will focus more on encouraging social resources to tilt toward key and weak fields of economic development such as people’s livelihood, green industry and inclusive finance.

Highlights of Key Events in China’s Financial Sector

PBOC Published a Green Finance Evaluation System, the ESG Concept will Play a more Important Role in Financial Institutions

Responsible investment has been highly regarded and has reached a certain scale in recent years. The introduction of environment, social and governance (ESG)-related policies has led banks and rating agencies to also add ESG concepts into credit policy and rating criteria. Fitch Ratings introduced ESG Relevance Scores in 2019, aiming to assess the impact of ESG on ratings. China’s Financial Stability Board (FSB) has created a Task Force on Climate-Related Financial Disclosures (TCFD). Societe Generale, as the vanguard of banking green finance, was the first to share its implementation experience under the TCFD framework.

China is one of the key participants in the ESG investment field. Under the goal of carbon peak and carbon neutrality, green finance will enter into a stage of rapid development. The PBOC issued its “green finance evaluation scheme of bank financial institutions” (《银行业金融机构绿色金融评价方案》) in July 2021, which aimed to encourage financial institutions to increase green asset allocation and boost capacity to serve the green economy.

The balance of green credit in China reached RMB.3 billion by end-1Q21, up by 24.6% yoy. The two-year CAGR exceeded 18%. From the industrial distribution of loans, we can see that green loans focused mainly on traffic transportation and life energy, accounting for 58.17% of total green loans.

The rapid development of the green economy, introduction of the green industry catalogue, and the share of green loans in other industries such as green construction and green agriculture, will increase steadily, and industrial distribution of green loans will tend to be more diversified. Green bonds are the second-biggest carrier in the Chinese green finance system. From January 2016 to May 2021, accumulated issuance of green bonds rose to RMB136 trillion and outstanding bond scale exceeded RMB1 trillion. According to disclosure by the China Banking and Insurance Regulatory Commission, the balance of Chinese green loans and the outstanding scale of green bonds in the country ranked first and second, respectively, on a global scale.

The main participants in green finance at present are the banks. After “AtRenew” listed on the London Stock Exchange in 2Q21, more diversified green finance products such as green security, green trust, green leasing and green insurance will support the construction and development of the green finance system of non-bank financial institutions.

On the other side, social and governance factors will also have a certain influence on financial institutions. According to the ESG Relevance Scores of financial institutions published by Fitch Ratings, corporate governance has become an important factor. The China Banking and Insurance Regulatory Commission also introduced several policies related to corporate governance in order to regulate the governance framework. (See: ESG concepts are receiving increased attention in China and will exert greater influence on financial institutions in the future (ESG概念受重视程度提升,未来将对金融机构发挥更大影响力))

Fitch Bohua believes that China is leading the renewable energy sector, and that the financial system plays an important role in the ESG investment field. The ESG concept is also an important factor in evaluating the sustainable development ability of enterprise. The financial institutions – incorporating ESG into investment decisions – will benefit from enhancing their risk-management framework and achieving long-term excess return.

Financial Supervision Strengthened Further in 1H21, Preventing Risks Become the Emphasis of Supervision

Chinese regulatory authorities continuously implement the concept of preventing systematic financial risks. The working conference of the China Banking and Insurance Regulatory Commission announced this year that the disposal of non-performing assets should be improved, the disposal of high-risk institutions should be accelerated, and financial risk should be defused continuously.

Fitch Bohua believes that the overall risk of Chinese financial institutions is controllable at present. Yet at the same time, regulatory policy should also advance, with financial ecology becoming more diversified and complicated. In 2Q21, supervision departments introduced several regulatory policies, which telegraphed the signal of strengthening all-around supervision and preventing risks. The policies focused mainly on corporate governance, recovery and disposal plans of financial institutions, and the absence of supervision in certain fields.

In terms of corporate governance, Chinese supervision announced the “Code of Corporate Governance for Banking and Insurance Institutions,” (《银行保险机构公司治理准则》) and “Code of Heavy Stockholder Behaviour for Banking and Insurance Institutions, pilot edition, draft for comments” (《银行保险机构大股东行为监管办法(试行)》(征求意见稿)). Fitch Bohua believes that the regulations related to corporate governance and stockholder behaviour, which have been continuously introduced recently, is helpful to improve risk-management in the long term, and to some extent prevent senior management and stockholders from conducting affiliate transactions. As for some weak links in supervision such as cash-management products and property insurance charge, Chinese supervision also revised and introduced the “Administrative Procedures for Clause and Charge of Property Insurance, pilot edition” (《财产保险公司保险条款和保险费率管理办法(征求意见稿)》) and “the Notice on management issues of regulating cash management products (《关于规范现金管理类理财产品管理有关事项的通知》) in order to shore up weak links in supervision. Fitch Bohua believes that updated clauses and charge of property insurance, aiming to promote optimization of products and prevent unfair competition resulting from homogenization, will be beneficial to boosting profit and the steady growth of property insurance industry in the long term.

In 2H21, Fitch Ratings also revised the assessment for China’s bank operating environment (OE) from ‘bb+’/stable to ‘bbb-‘/positive, and upgraded the Viability Rating (VR) for the six Chinese state banks alongside the revision to China’s OE. These actions reflected reforms that have led to progress in guarding against systematic financial risk, economic resilience under the influence of Covid-19, and strengthening the stability of financial markets.

Strict Control on Incremental Risk: Real-Estate Loan-Concentration Ratio of Banks has Decreased; Credit Level of Some Real-Estate Enterprises has Declined; Disposal Pressure on Non-Performing Loans to Real Estate has Increased

Chinese supervision is focusing more on risk prevention in 2021, whose prominent feature can be concluded as strict control on incremental risk and mitigation of existing risk. After the introduction of the centralised real-estate loan-management system, policy effects have shown positive signals. Citing the China Banking and Insurance Regulatory Commission, the real-estate loan concentration ratio decreased by 0.5% by April 2021. All the banks have reduced loans to the real-estate industry. According to statistics from the PBOC, real-estate loans rose by 10.9% in 1Q21 yoy, down by 1.9% from end-2020. The proportion of real-estate incremental loans has also fallen substantially, from 27.2% to 21.7%.

Operating and financing conditions have deteriorated under further regulation of the real-estate sector. In 2Q21, Fitch Ratings downgraded the Long-Term Foreign-Currency Issuer Default Ratings (IDRs) of several real-estate issuers such as China Evergrande Group (B/Negative), Oceanwide and Ronshine China Holding Limited (BB-/Negative).

At the same time, the decline in credit levels of real-estate enterprises has transmitted through to bank loans. The balance of non-performing real-estate loans in 2020 increased significantly. According to banks’ 2020 annual reports, the non-performing loan (NPL) balance for the real-estate industry of state banks and joint-stock banks rose from RMB50.37 billion to RMB73.21 billion, up by 45.34%, which is higher than the growth of total NPLs (16.77%). The average NPL ratio of the real-estate industry has also increased by 0.36%, to 1.53%.

Fitch Bohua believes that real estate may be one of the largest sources of potential financial risk in China, considering the fact that real-estate loans still account for 40% of the total. In 2H21, further supervision and a deteriorating operating environment in real estate may mean that the non-performing assets balance of real estate may still increase and create extra pressure for the disposal of non-performing assets.

Mitigating Existing Risk: China Huarong Asset Management Repays Outstanding Debt on Time – May Accelerate this to Concentrate on Non-Performing Asset Operations

In April 2021, China Huarong Asset Management (“Huarong”) announced that the disclosure of its 2020 annual report would be postponed and that Huarong’s stock on the Hong Kong exchange would also be suspended. This raised concerns among investors over possible credit default. Huarong is one of the four national asset-management companies (AMCs), whose controlling shareholder is the Ministry of Finance (MoF). The core business of Huarong includes operating NPLs, financial services, asset management and investment business. Up to July 2020, the MoF owned 57.02% of Huarong while the National Council for Social Security Fund held 4.39%.

According to Reuters, China supervision has coordinated several banks with the purpose of maintaining credit supply to deal with liquidity risk. Judging from the latest progress, Huarong has maintained repayment of outstanding debt on time. From April 1st 2021 to June 23rd 2021, Huarong and its subsidiaries repaid outstanding domestic and foreign bonds amounting to RMB43.47 billion. Under the supervision requirement that asset-management companies should return to non-performing business, the other three national asset-management companies (AMCs) began to integrate diversified businesses other than the non-performing assets business. For Huarong, stripping off non-core business or inferior subsidiaries may also be an effective strategy for transformation. Citing Reuters, Huarong is planning to dispose of its financial subsidiaries to reduce capital occupation on the parent company.

Fitch Bohua believes that Huarong is systematically important to a certain extent under the conditions that the disposal of non-performing loans will be strengthened. At the same time, in the interests of financial stability, the Chinese government remains strongly willing to support Huarong. China supervision is still seeking solutions to resolve the Huarong event satisfactorily.

Fitch Bohua Performance Review of Chinese Financial Institutions

Net Profit Growth of Banks has Changed from Negative to Positive in 2021; Asset Quality Improves; the Tail Risk of Institutions has been Defused Continuously

Net profit growth for commercial banks decreased to negative (-2.71%), affected by the Interest Concession Policy and increased provision in 2020. Furthermore, banks strengthened the disposal of non-performing assets, amounting to RMB 0.3 billion in 2020. The business environment for the banks improved in 2021, with the fading-out of the counter-cyclical policy. Net profit growth increased to 2.4% in 1Q21, and the NPL ratio decreased by 4bp to 1.8% qoq. The proportion of ‘special mention’ loans decreased by 15bp from end-2020. We expect the asset quality of bank institutions to improve further, considering the increasing of bad loan disposal efforts in 2021.

Judging from the different types of bank institutions, the net profit growth of city and rural commercial banks increased by 14% in 1Q21, compared with that of end-2020. However, although the overall asset quality of the banking industry improved, the NPL ratio of city commercial banks increased by 13.1bp to 1.91% in 1Q21. This reflected the difference in performance recovery of regional banks still being large under the conditions of increased divergence of regional financial ecology. The current risk of some regional banks is accumulating. Several regional banks have been downgraded in 2021 by domestic rating agencies because of declining asset quality and inadequate capital. In order to defuse the tail risk of institutions, regional banks in several provinces including Sichuan and Shanxi, Liaoning have been merged. At the same time, total issuance of ‘Special Bonds’ for local banks exceeded RMB50 billion, to supplement bank capital. The issuance of Special Bonds will help to relieve the pressure on the capital of regional banks. (See: City merchant banks: regional differentiation pronounced urgent need for capital replenishment (城商行专题: 区域分化愈加显著,资本补充需求迫切), Banking sector hit by COVID-19, large state-owned banks outperform peers(疫情下银行业受到冲击,国有大行利润增速领跑同业,多项指标保持领先))

Fitch Bohua believes that macroeconomic recovery will stimulate the improvement in the business environment for banks. However, defusing risk may be accelerated after the shock of Covid-19, with the increasing divergence of regional financial ecology.

Insurers' Overall Solvency Adequate; Life Insurers’ Credit Profiles Diverged

The solvency of insurers has continued to improve, with an average comprehensive solvency adequacy ratio of 246.7% as of end-1Q21, up by 0.4% from end-2020, according to CBIRC. Chinese insurance companies have a strong buffer to withstand potential risk.

Fitch Bohua’s credit rating test results for life insurers indicate that the industrial profile and operating environment is stable. The top life insurers have a significant competitive edge, while the small and medium-sized companies relatively concentrated for their business profiles. The profitability of this sector has diverged: larger life insurers with longer operating histories and value-oriented foreign entities exhibit more stable profitability. (See: Overview of the Life Insurance Credit Rating Testing Result(惠誉博华寿险信用评级测试概述))

Fitch Bohua believes that the insurance industry as a whole will maintain adequate capital levels, a solvency ratio in a high range, and overall manageable risk. The profitability of large Chinese and foreign life insurers remains stable.

Finance and Leasing Companies have Diverged; Consumer Finance Companies’ Earnings Fell Sharply

Finance and leasing companies consist mainly of a financial leasing company, an auto-financing company and a consumer finance company, based on Fitch Bohua’s rating criteria. Financial and leasing companies are closely linked to the real economy, have a high degree of industrial concentration, and are generally smaller and less resistant to risk than insurers and banks. Fitch Bohua selected 11 top entities as analysis samples. Performance declined for all samples in 2020, including financial leasing, auto-financing and consumer finance, according to their annual reports.

Sample financial leasing companies have high business concentration. These enterprises increased leasing assets for public utilities further during the pandemic, so that the overall asset quality remains resilient. These financial lessors’ operating income and net profit grew slightly slower than before the outbreak, but still achieved positive growth. The pandemic’s impact on financial leasing firms as a whole was limited. (See: Financial Leasing Companies Diverge, Asset Quality Remains Resilient Under Stress(金融租赁公司分化明显,压力情景下资产质量保持韧性))

“Fitch Bohua’s inter-bank Auto ABS index” shows that auto loans’ M2 overdue rate increased in 1Q20. Asset performance improved gradually in 2H20 as the economy recovered. The inter-bank car loan index has recovered gradually to pre-pandemic levels by March 2021. Sample auto-finance company revenue grew modestly by 1.25 % in 2020, while net profit declined by 8.7 %. Credit Size May Pace into a New-Round Growth, and Low Growth of Auto Finance May Intensify Industry Competition, Domestic Brand Auto Finance Companies Expand in Lower Markets(汽车金融市场低速增长或加剧行业竞争,国产品牌汽车金融公司布局下沉市场应对挑战))

Consumer finance was hit hardest by the pandemic. Fitch Bohua’s inter-bank consumer loan ABS index indicates that the consumer loan M2 overdue rate index was still at a high level and the recovery process was slow as of end-1Q21. The asset-quality decline has prompted the respective companies to boost their provisions, dragging down their earnings performance, with the net income growth of tested companies slipping by more than 17%.

Fitch Bohua believes finance and leasing companies are the most seriously affected by the pandemic among financial institutions, and performance within the sector has diverged. However, financial leasing companies actively reduced their risk appetite and maintained resilient asset quality during the outbreak. Consumer finance companies were more affected, with downward pressure on asset quality and sharp increases in provisions dragging down their net profit.




Norman Sheng
+8610 5663 3826

Frank Zhang
+8610 5663 3827

Joyslin Gao
+8610 5663 3820

Li Peng
+8610 5663 3823

Yunqiao Li
+8610 5663 3821



This report is based on publicly available information or research that Fitch (China) Bohua Credit Ratings Limited ("Fitch Bohua") believes reliable. However, Fitch Bohua does not represent or warrant the accuracy or completeness of such information or materials. The opinions, assessments or forecasts contained in this report reflect the judgement and views of Fitch Bohua as at the date of this report, and at different time Fitch Bohua may issue reports that contain views or forecasts that differ with those in this report.

The information, opinions, estimates or forecasts contained in this report are for information purposes only and this report does not constitute a recommendation to any person or institution to buy, hold or sell any asset; this report does not comment on the reasonableness of market prices, the suitability of any investment, loan or security (including but not limited to any accounting and/or regulatory compliance or suitability) or the tax-exempt nature or taxability of amounts relating to any investment, loan or security. This report should not be relied upon by individuals or institutions as a factor in making investment decisions. Neither Fitch Bohua nor the relevant analysts accept any liability whatsoever for any loss or damage arising from the reliance on or use of this report.

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