Chinese banks are experiencing sell-offs due to concerns over non-performing loans and a potential hard landing for the mainland economy, but a number of analysts think these fears are exaggerated.
In an interview with CNBC on Wednesday, Jim Antos, bank analyst at Mizuho Securities, said even if the country experiences a hard landing, he didn't expect a major deterioration of non-performing loan (NPL) ratios. That's because banks had a lot of latitude on how they handle NPLs. He also feels Chinese banks are "money machines" capable of rebounding from the setbacks.
What's more, the Chinese government may have more control over how the economy lands than many may think.
In a Reuters poll of economists, most say the China's economy may be more difficult to slow than anticipated. They suggest government spending and tweaked interest rates can easily be raised to offset any unwanted dips and be used to make the drop as smooth as possible.
According to CNBC:
Separately, analysts said China had strong political reasons to prevent the problems in the shadow banking system from impacting the Big Four lenders, namely Bank of China, China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC) and Agricultural Bank of China.
A lot of the banks have essentially ring-fenced themselves from these risks over the past 18 months and the CBRC, the banking regulator, has essentially put a divide between the banks and some of these trust companies last year, so the amount of collaboration between these two entities is on the decline over the past 12 months or so," said Mike Werner, senior equity analyst covering Chinese and Hong Kong banks at Sanford C. Bernstein in Hong Kong.
Many of these banks release earnings this week, and analysts in the CNBC interview aren't worried. However, they do suggest caution for short-term investors. "This week's earnings would prove to be short-term positive through this earnings week, enabling banks to outperform the market but after that, the medium term concerns on asset quality, equity raising and a bunch of other things will likely come back," says May Yan, director and head of China banks research at Barclays Capital.
Of course, not everyone is so cheery. "Dr. Doom" Roubini (the man who correctly predicted the 2008 financial crisis) believes the Chinese economy will experience a hard landing, not necessarily from non-performing loans, but from the country's over-investments in infrastructure that currently average around 50% of the national GDP. He says this unsustainable investment trend has led to economic downfalls in the past, and China should be no exception. Certainly Chinese banks would take a hit if the investments trend were to backfire.
Time will tell if the skeptics of the hard landing are correct or not. But we were wondering, what Chinese financial stocks will be most affected in a hard-landing scenario?
We list below the top six Chinese financial stocks on the U.S. exchanges. Do you think these names will take a hit? Use the list as a starting-off point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. China Life Insurance
2. China Real Estate Information
3. E-House (China) Holdings Limited
4. Noah Holdings Limited
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Rebecca Lipman does not own any of the shares mentioned above.