China's Banks Are Looking Less Shadowy

Joey Wong | 05/04/2017
China

Summary

Our Grassroots℠ Research survey of bank managers in China sheds light onto a sector not known for transparency. A new breed of lower-risk wealth-management products and signs of a healthy mortgage market may support a more positive view of the country’s banking industry.

Key takeaways
  • Demand is strong for WMPs, with NAV-type products gaining traction
  • Mortgages are considered a healthy and lucrative business for the banking sector
  • Most of our sources believe the overall loan default rate will stay low

For years, some market-watchers have voiced concerns about the health of China's banks and questionable sales of wealth-management products (WMPs). These investment vehicles offer attractive yields and imply backing by the issuing banks, yet their portfolios are not always transparent and banks frequently do not record them on their balance sheets – giving rise to fears of systemic risk.

When our Grassroots℠ Research team recently talked to bank branch managers in China about these issues, we found that demand for WMPs remains strong. But there is growing consumer interest in a new, more transparent product. We also found ample evidence of a healthy mortgage market that supports our generally constructive perspective on these banks.

Among our key findings:

  • Most of our sources said WMP sales trended up between December 2016 and February 2017 – by an average of 11 per cent – as other investment options, such as stocks and housing, remained unattractive.
  • Loan quotas are expected to stay unchanged this year due to government efforts to curb the overheated housing market and general concerns about China's business environment.
  • Our sources expect mortgage loans in 2017 to remain the main source of loan business, while property-backed consumer loans should see significant growth.
  • Two-fifths of our sources expect the loan default rate to remain flat in 2017, but half expect it to trend higher.
  • Still, most believe the overall loan default rate will stay low, and we did not find any sign of default risk increasing in recent months.

Our GrassrootsSM study also found that net-asset-value–type WMPs have gained traction among banks and customers, which Research Analyst Helen Ye found interesting: "NAV-type products remove the implicit-guarantee obligation from banks and require them to educate customers about their own risk exposure."

The findings about muted loan growth and continued reliance on mortgages as the primary source of new loans are similarly encouraging. "Mortgages are considered a healthy and lucrative business for the banking sector," said Ms Ye. "These results run counter to the market's concerns about continued excessive credit growth in China's economy and are supportive of our investment perspective on China's banks."

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Joey Wong

Vice President, Research Analyst
Ms. Wong is a research analyst and a vice president with Allianz Global Investors, which she joined in 2010. She is a member of the Asia Pacific research team and a member of the Grassroots℠ Research team. Ms. Wong has six years of investment-industry experience and 10 years of experience in market research. She was previously a research manager at the Nielsen Company in Hong Kong. Ms. Wong has a B.S. in commerce, with a double major in finance and marketing, from the University of Auckland, New Zealand.

Low Inflation Means ECB Should Stay the Course

Franck Dixmier | 5 days ago
European Central Bank

Summary

We don’t expect the European Central Bank to announce any policy changes at its next meeting, given that euro-zone inflation is still weak. In fact, the ECB will probably take pains not to make any statements that could move markets, even as it quietly adjusts the allocation of its bond holdings.

At its monetary policy meeting this week, the European Central Bank is expected to use the recent downturn in inflation to justify continuing its asset-purchase programme until the end of 2017. The ECB is also expected to maintain its current forward guidance about its intended monetary policy.

In line with the comments made by members of the ECB's policy committee in recent weeks, ECB President Mario Draghi is expected to emphasize that euro-zone inflation is neither self-sustaining nor sustainable. He will also likely highlight that it remains below the 2 per cent medium-term target level, with annual core euro-zone inflation decreasing from 0.9 per cent to 0.7 per cent at the end of March. Wage inflation, which was 1.6 per cent annualized at the end of 2016, should provide additional strong support for this analysis.

Against this backdrop, the ECB will probably conclude that it is too early to announce plans to further reduce its asset-purchase programme, particularly given that making any public statement about tapering would cause financing conditions to tighten by driving rates higher, which would make issuing such a statement counterproductive to the central bank’s goals.

At the same time, the total amount of the ECB's monthly purchases was reduced for the first time in April, from EUR 80 to EUR 60 billion, and markets may have questions about the allocation of the ECB's holdings. Based on data available earlier in the month, it appears that corporate-bond purchases are being maintained at a high level, which implies that sovereign-bond purchases are being reduced as a matter of priority. By taking this approach, which is similar to the Bank of England’s, the ECB is likely aiming to maintain optimum refinancing conditions for euro-zone companies.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Expert-Image

Franck Dixmier

Global Head of Fixed Income, CIO Fixed Income Europe
Franck Dixmier is Global Head of Fixed Income and Chief Investment Officer Fixed Income Europe. Franck is a member of the Global Executive Committee as well as the European Executive Committee at Allianz Global Investors. Franck joined Allianz Group in 1995.
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