Moody's warns of deteriorating Chinese banks' asset quality

The US-based ratings agency, Moody’s Investor Service in its latest report published on Tuesday warned over the deteriorating asset quality at Chinese banks. Moody's said the Chinese banks are facing increasing risks as a result of China's economic slowdown, rising leverage in the system, and financial sector interconnectedness.

Moody's noted that level of nonperforming loans (NPLs) at China's bank rose to 1.76 percent of gross loans at end-September 2016, up from 1.67 percent at end-2015 and 1.25 percent at end-2014 -- while credit costs are also rising.

The agency also warned that rising level of interconnectedness between the formal banking system and the shadow banking system is another source of risk. It highlighted that the level of interconnectedness has doubled in size these last 5 years with its assets equal to 82 percent of GDP at the end of June 2016.

Moody's Investors Service said liabilities of state-owned enterprises (SOEs) increased and reached nearly 120 percent of gross domestic product (GDP) at end-September 2016. However, it also added that reform of SOEs will continue at a gradual pace, given the need to balance the central governments' multiple commitments.

"The authorities have issued implementation directives at a faster pace recently, but we expect them to remain cautious in adopting reforms," says Lillian Li, a Moody's Vice President and Senior Analyst. "This is because progress on implementation of SOE reform is subject to the central government's other reform objectives, such as maintaining a moderately high level of GDP growth and the stability of the social and financial systems."