Fitch Ratings Upbeat about China’s Bank Operating Environment

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Fitch Ratings is optimistic about the bank operating environment (OE) in China following efforts to reform the sector by regulators as well as the comparatively strong performance of the Chinese economy in the wake of the COVID-19 pandemic.

Fitch announced on 23 May that it had upgraded its assessment of China’s bank OE to ‘bbb-‘/Positive from ‘bb+’/Stable, in a move that reflects “progress on financial reforms to curb systemic and contagion risks, as well as the country’s economic resilience during the Covid-19 pandemic.”

“China’s relatively high degree of macroeconomic stability and the sovereign’s fiscal strength have created a backdrop against which policymakers have been able to enhance the efficacy of prudential supervision and reduce systemic financial risk in recent years,” said Fitch in a press release.

“The higher OE score reflects progress in stabilising leverage, sustained strengthening of the regulatory framework, stricter asset-impairment recognition, and increased emphasis on capital sufficiency.

“These developments, which have contributed to greater credit efficiency and a stabilising potential capital gap, will improve financial stability over time.”

Fitch also forecasts ongoing declines in the scale of China’s shadow banking sector as well as its share of GDP in 2021, after hitting a peak in 2017 before contracting steadily for the past several years.

Their projections see the Chinese shadow banking sector falling to under 30 trillion yuan for a share of GDP of around 30%, as compared to over 55 trillion yuan and a more than 66% share of GDP in 2017.

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