China’s Financial System Leverage on Track to Hit Record High in 2020: Fitch Ratings

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A new report from Fitch Ratings sees leverage in China’s financial system rising to a record high in 2020 as a result of the economic impacts of the COVID-19 outbreak.

“Our analysis shows that the ratio of outstanding Fitch-adjusted total social financing (FATSF) to GDP will jump 18pp to a new high of 273% in 2020,” said the Report.

Fitch’s FATSF figure does not include central government bonds and local government bonds, which have been included in the official total social financial (TSF) data since December 2019, or local-government special bonds, which have been included in the TSF data since September 2018.

The Report expects this rise to be temporary, however, given Beijing’s ongoing focus on containing risk in the financial sector and efforts to improve the capitalisation levels of vulnerable banks.

“Fitch’s forecasts for nominal GDP growth appear lower than the government’s, which can be inferred from the NPC budget targets,” said the report.

“However, we expect the upward trend in leverage to be short-lived as economic recovery in 2021 should see overall system leverage maintained at a stable level in 2021.”

Loan growth this year is likely to be dominated by corporate and financial inclusion loans, while consumer lending will suffer as a result of the impact of COVID-19 on incomes.

Beijing has called for the big state-owned banks to boost financial inclusion loans to micro-and-enterprises by 40% in 2020, following a rise of 50% in 2019.

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