21 October 2016
Slower deposits growth could crimp the margins of Chinese banks. Photo: Bloomberg
Slower deposits growth could crimp the margins of Chinese banks. Photo: Bloomberg

China capital outflow may weigh on bank margins, deposits

China’s ongoing capital flight, hastened by projections for a weaker yuan, may be squeezing the availability of domestic bank deposits. Growth in deposit balances has decelerated, rising just 1.1 percent from August through December last year.

That compares with a gain of 15.9 percent in the first half of 2015 and 9.6 percent in 2014. If businesses and Chinese citizens continue to move capital offshore, this may increase deposit and funding costs at China’s banks.

Slower growth in bank deposits may also crimp lenders’ margins, which have already been squeezed by the People’s Bank of China’s rate cuts through 2015.

The average net interest margin of six of China’s largest banks — CCB, BOC, Bocom, CMB, Minsheng and Citic — was 2.4 percent in the first nine months of 2015, narrowing by 11 basis points from the same period in the previous year.

Capital outflows that evade the banking system are also another concern for lenders. The exodus of capital from mainland China may flow through channels outside the nation’s banks, making it difficult for the government to track.

Outbound tourist transactions and bulk cash smuggling are among the more common avenues residents may consider for capital flight. Chinese tourists will spend US$200 billion to US$500 billion abroad annually, according to estimates by Shanghai-based asset manager Canaan Capital.

Bank fees from foreign-exchange remittance and related transactions may fall as a result. ICBC, China Construction and Bank of China are among China’s biggest banks providing foreign-currency remittance and exchange services worldwide. Global banks such as HSBC, Standard Chartered and Citibank are also competing in this business.

The views expressed in this article are those of Francis Chan, a senior banking analyst at Bloomberg Intelligence.

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