Chinese banks warned of heightened risks as shadow banking sector grows

Find out which types of banks are most vulnerable.

According to BMI Research, the structural slowdown that the Chinese economy will experience over the coming years will be negative for China's banking sector, and the rapid growth of the country's shadow banking sector raises the risk of financial instability as such activities often lack proper disclosure and are opaque in nature.

Here's more from BMI Research:

In particular, we highlight that jointly-owned (JSBs), city and rural commercial banks (CCBs) are more vulnerable than state-owned financial institutions as middle-tier and smaller banks have grown their shadow loan portfolios at a rapid pace.

A greater exposure to trust beneficiary rights (TBRs) band directional asset management plans (DAMPs) enable Chinese banks to undertake risky corporate lending while circumventing higher capital requirements.

The usage of such vehicles has also allowed Chinese banks to maintain relatively healthy headline NPL ratios. We believe that at 1.8% in March, NPLs are significantly understated, and they are set to rise further over the coming months, which will hurt profitability, especially against a backdrop in which there will be an increasingly lack of profitable lending opportunities.