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China’s banks set for a rougher ride

Chinese banks face a potential corporate defaults crisis for the first time in five years.

Despite the odd splutter, China’s leading banks have had much to cheer about over the past few years. Multi-billion-dollar stock market listings, improvements in their balance sheets and a strong upturn in profitability mean that these banks are no longer the basket cases they once were.

Last year, in particular, was as good as any for most Chinese banks, according to Fitch Ratings, buoyed up by acceleration in loan growth, record earnings, and diminishing bad debt portfolios. In August, China Merchants Bank became the first Chinese bank to achieve an individual rating above D from the ratings agency when it was upgraded to C/D. The individual rating reflects a bank’s creditworthiness on a fully standalone basis. Although a C/D rating shows there’s room for significant improvement – after all the highest possible rating is A and the lowest is F for failed – at least it demonstrates that China Merchants Bank is on the right track. Fitch believes that other leading Chinese banks might get their individual ratings upgraded this year.

If they do, it will be against a much less supportive backdrop. Uncertainty about a possible US recession is one issue but of more concern is the increasingly delicate state of China’s economy.

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