When China announced its GDP growth target of 5% for 2024, it surprised on the upside. The World Bank forecasts growth of 4.5%, while the IMF projects 4.6%, declining to 3.5% by 2028. Interestingly, UBS's chief China economist, Tao Wang, maintained her 4.6% growth forecast even after the official target was released.
Beijing will undoubtedly report that it has hit the target, but the path to getting there remains unclear. A strong policy response is off the table, with only a mild stimulus on the cards to put a floor under growth.
China's leaders believe the previous flood of money sowed the seeds for today's woes, including the real-estate crisis, and now it is time to pay the price for the debt-fuelled excesses of the past decade.
What policy tools remain available to get to 5%? With other channels weakened, the country is increasingly turning to the banks to channel liquidity into the real economy.
In 2023, total new lending in China amounted to Rmb22.75 trillion ($3.6 trillion), a historic high and representing 6.1% year-on-year growth. This year, new loans hit Rmb4.92 trillion in January, another record high.
This surge in lending has primarily come from state-owned banks, which are mandated to support the government's economic agenda. Surprisingly, the largest state-owned lenders have outpaced their smaller counterparts in new loan growth.
"Historically, smaller banks have outpaced larger institutions in loan growth," observes Shujin Chen, head of China financial and property research at Jefferies. "For example, state-owned banks would typically record loan growth of around 8%, while joint-stock banks would see growth of 10%. But last year, it was the opposite. The largest banks grew at 12%, much faster than small banks."
Among the big four state-owned banks, Agricultural Bank of China (ABC) has emerged as the frontrunner, boasting the highest growth volume and rate of new loans. In the first nine months of 2023, ABC wrote new loans totalling Rmb2.57 trillion, up 13%.
A deeper dive into the bank's half-year report uncovers a striking fact: 80% of these new loans were funnelled into the public sector, fuelling “the country's regional development strategy”.
This has led to a reshuffling of the deck, with ABC overtaking China Construction Bank (CCB) to rank second in the country by total asset size.
This has not escaped the market’s notice. ABC's onshore share price rose a staggering 35% in 2023.
In contrast, China Merchants Bank (CMB), long considered a favourite among foreign investors, saw its share price plummet by 22% in 2023. This can be partially attributed to CMB's sluggish loan growth, which was negative until the end of September.
A bank's ownership structure may now be a key determinant of its stock performance
CMB's traditional stronghold in retail banking, particularly in the wealth-management and the mortgage sectors, has been hit hard by the real-estate market downturn. It has maintained limited exposure to the public sector, which is characterized by higher risk and lower margins. However, in this environment, the public sector may be the only route to strong new loan growth.
A bank's ownership structure may now be a key determinant of its stock performance. State-owned banks are better positioned to support national priorities, so the market likes them more.
The trend has extended beyond banking, with large state-owned enterprises (SOEs) across various industries – from oil producers to telecommunications companies – enjoying surging stock prices.
However, strong stock performance does not necessarily translate to robust fundamentals.
"For some large banks, they lent money to SOEs at an annual rate of 1.5%," says one banking analyst. "These SOEs simply put the money in a second bank for an annual deposit rate of 2% to earn the arbitrage. Banks don't earn anything in such scenarios."
Indeed, Chinese banks, regardless of ownership, have reported a pervasive decline across all critical performance indicators in 2023, including revenue, net interest income, net interest margin, and net fee and commission income.
And both ABC and CMB managed to eke out profit increases only because of a reduction in impairment losses, essentially thinning their security buffers.
It is tempting to paint a simple narrative of a state sector advance while the private sector retreats. Optimists argue that this trend is underpinned by a deep-seated faith in the government's capacity to ensure the stability of financial institutions, potentially paving the way for an economic rebound.
Others suggest that this is simply driven by the pursuit of dividends, anchored in the unwavering belief that SOEs will maintain their dividend policies, even in the face of market turbulence.
