China Total Credit Increases $1 Trillion In Q113

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China’s banking system is the largest in the world as measured by profits –according to a new report from Ronit Ghose, an analyst at Citigroup. Chinese total bank landing was $1 trillion in the first quarter. This includes the shadow banking system which made up half of that number. In some respects, that means China’s shadow banking system is the size of the ‘regular’ banks. Ronit forecasts $300 billion of net profits in 2013-14 or c30% of Citi’s global bank coverage universe. High profits reflect a large balance sheet, c2.5-4x bigger than peers. During 2009-12, total credit increased c$10 trillion and bank loans c$5 trillion. China has accounted for c60% of total global loan growth since 2009 and a remarkable three-quarters in 1Q13. To put this into context, China accounts for c8% of global GDP. Further details from Citi’s report on below.

China Bank Lending

In 1Q13, China’s official bank lending increased by a net half a trillion dollars. Including the so-called ‘shadow banking’ system, China’s total credit increase in 1Q13 was a net trillion dollars (RMB6.2 trillion). This was larger than most geographical groups and probably the single largest driver for credit increase globally in 1Q13. The immediate next group of Asia ex-China/Japan generated less than $100bn in bank loans in 1Q13.

China

UK and Euro Area were negative during the same period. China accounted for c75% of total global loan increase in 1Q13.

Banking system loans

banking system loans increased

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China was the single biggest contributor to total lending in 2009-12 globally

The trend is not very different if we look at the aggregate bank credit increase in 2009-2012. In fact, over the past four years (2009-2012), China added a little less than US$10 trillion in system credit and about US$5 trillion in bank loans. Other emerging markets (Asia ex-China/Japan, CEEMEA, LatAm) also increased bank loans substantially between 2009-12. However, China still accounted for the lion’s share (c.57%) of the global increase. Overall, the large size of the Chinese banking sector is a consequence of the steep organic growth it has witnessed over the past few years.

banking system loans increased (USD BN)

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Disaggregating China’s Credit Growth

Interestingly, when we look at either total credit growth in China (also called ‘Total Social Financing’ (TSF) or banking system loan growth in real terms, they both seem to be growing faster than real GDP. The trend is particularly evident post 2008 when TSF measured in real terms started steeply outpacing the real GDP growth trend.

The declining efficiency of credit expansion in generating GDP growth is driven by government’s large fiscal and monetary stimulus during the global financial crisis in 2008-09. Though bank loans form a major proportion of the TSF number, the steep increase in real TSF post 2008 is primarily driven by non-traditional bank lending growth.

China total system credit

ratio of gdp growth

Looking closely at the mix of TSF over the years, we note that although bank loans constitute a large portion of TSF, trust loans, entrusted loans, bank trust bills and corporate bonds have grown over the years in the TSF mix. Interestingly, Rmb + Forex loans as a % of total TSF mix has gone down from 96% at Dec 2002 to 58% at Dec 2012, pointing towards fast rising non-bank credit sector in China.Looking closely at the mix of TSF over the years, we note that although bank loans constitute a large portion of TSF, trust loans, entrusted loans, bank trust bills and corporate bonds have grown over the years in the TSF mix. Interestingly, Rmb + Forex loans as a % of total TSF mix has gone down from 96% at Dec 2002 to 58% at Dec 2012, pointing towards fast rising non-bank credit sector in China.

This is driven largely by the tightening of bank credit and financial liberalisation (in the trust and securities sectors, corporate bond market) in the last few years, that have allowed companies to tap credit from new and emerging channels other than bank lending.

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the flow of credit

helping to boost the credit

China’s lending mix has been shifting in recent years. In 2009, consumer loans accounted for only c26% of total lending, whereas over the past year it has been 37% on average. Short-term corporate lending has also increased dramatically from on average 17% in 2009-10 to 37% during 2011 and 35% over the past year. The share of medium/long-term lending has dropped materially over the past few years, from 70% average in 2009 to 43% average over the past year.

breakup of total social financing

china rmb fx loans

China’s lending mix is shifting – higher consumer and short-term corporate lending in recent months

Any shift towards a more consumer-oriented vs investment/capex-driven economy should be accompanied by greater growth opportunities in retail/consumer banking. However, this is a market segment from which international banks are effectively shut out. Even the most Sinophile of international banks, such as HSBC, have a small branch distribution network relative to the domestic champions in China.

Lending mix shift points towards more opportunities in retail banking – a relatively weaker field for foreign banks

There may be opportunities to grow in specific products such as credit cards, where international brand strength and product development and marketing experience could provide an opportunity. But even here regulatory restrictions stifle foreign entrants. The first international bank to offer its own branded credit card in China (and not via a JV) was as recently as 2012.

china - new loan composition

long term loans

china consumer loans outstanding

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Importantly, a rise in consumption should mean increased credit card spending that would impact banks, credit card companies and various other intermediaries. Looking at the number of credit cards per 100 adults, we find China ranks amongst the lowest in terms of credit card penetration, at only 24 credit cards per 100 adults.

average number of credit cards

Higher consumption would mean greater spend on credit cards; credit cards market to grow fast

The Chinese credit card market is fast growing and is poised to become one of the largest card markets in the world. Having said that, the issuance of new credit cards in China has normalised from c.35% Yoy growth in 2009 to 18% in 1Q13. On the other hand, transaction volume growth also normalised in 2012 to 7% growth from c35% in 2007-2009.

china yoy growth in credit card

china yoy growth in credit cards

A majority of these credit card transactions goes through China UnionPay (CUP) that operates an inter-bank transaction settlement system. China UnionPay was established in March 2002 and is controlled by the Chinese government. CUP enjoys a near monopoly in the Chinese cards market where companies like Visa Inc (NYSE:V) /American Express Company (NYSE:ASX) and Mastercard Inc (NYSE:MA) are not allowed access the domestic market. In 2010, CUP’s acceptance network accelerated extension to small and medium-sized Chinese cities and the broad rural regions.

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In order to meet the growing demand for card use by the Chinese in overseas business, travel and study, and to extend the services of domestic commercial banks abroad via the UnionPay network, CUP established partnerships in various markets (including Discover in US). CUP’s cards are now accepted in 141 countries and regions outside China. CUP also issues standard cards overseas, with a goal of providing payment convenience for foreigners in China. Presently, 65 institutions in 17 overseas countries and regions have issued UnionPay cards locally, with an accumulated card issuance volume of more than 10 million cards.A majority of these credit card transactions goes through China UnionPay (CUP) that operates an inter-bank transaction settlement system. China UnionPay was established in March 2002 and is controlled by the Chinese government. CUP enjoys a near monopoly in the Chinese cards market where companies like Visa/American Express and Mastercard are not allowed access the domestic market. In 2010, CUP’s acceptance network accelerated extension to small and medium-sized Chinese cities and the broad rural regions.

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China UnionPay settles interbank credit card transactions in China – has near monopoly

In order to meet the growing demand for card use by the Chinese in overseas business, travel and study, and to extend the services of domestic commercial banks abroad via the UnionPay network, CUP established partnerships in various markets (including Discover in US). CUP’s cards are now accepted in 141 countries and regions outside China. CUP also issues standard cards overseas, with a goal of providing payment convenience for foreigners in China. Presently, 65 institutions in 17 overseas countries and regions have issued UnionPay cards locally, with an accumulated card issuance volume of more than 10 million cards.

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