Moody’s says outlook for Chinese financial institutions through 2018 is stable

Moody’s Investors Service said its outlook for Chinese financial institutions through 2018 is stable due to tighter government regulations on the industry and steadying economic growth. Since last year, Beijing has take steps to rein in financial risks and prevent a destabilising build-up of debt in the world’s second-largest economy, particularly the unregulated shadow banking sector. But the government has said it will balance its efforts to contain risks with the need to keep growth steady. Policy sources have told Reuters that China is likely to keep this year’s growth target of “around 6.5 percent” in 2018. “The government will remain keen on adopting coordinated policy measures to curb shadow banking and interbank activities and to address key imbalances in the financial system,” Sherry Zhang, a Moody’s analyst, wrote in a report. “As for the operating environment, steadying economic growth and recovering commodity prices will support corporate profitability and therefore the asset quality of the financial institutions.” Moody’s said banks’ asset risks will stabilise on the back of improving company profits, despite high corporate leverage. But the risk of delinquencies remains pronounced among some highly leveraged and loss-making borrowers as they face higher borrowing costs amid tighter shadow banking regulations, Moody’s said. Banks’ capitalisation levels will remain stable, supported by slowing asset growth and capital-raising, though overall profitability will remain under pressure from higher funding costs and lower fee income growth, according to Moody’s.