The COVID-19 outbreak is having a much greater and more profound effect on China’s financial sector than the 2003 SARS epidemic.
First, people living in COVID-19-affected areas in China account for 90 percent of the country’s total population, whereas people living in SARS-affected areas in 2003 only accounted for 18 percent.
Second, the areas affected by COVID-19 normally contribute 92 percent of China’s GDP, while SARS-affected areas accounted for 26 percent.
Third, financial revenues generated from the areas affected by COVID-19 account for 86 percent of China’s nationwide revenue, while revenues from SARS-affected areas contributed 24 percent.
Regardless of whether the outbreak has been contained, the Chinese government rushed to rebuild its seriously severed financial network, beginning by dealing with debt.
On Feb. 1, the People’s Bank of China (PBOC) and other financial regulators issued a “Notice on Further Strengthening Financial Support to Prevent and Control Pneumonia of New Coronavirus Infection.”
Financial institutions may extend due dates or renew loans for businesses that are experiencing difficulties with repaying loans, lower interest rates on loans, increase the provision of medium and long-term loans, and reduce guarantee and re-guarantee fees, the notice says.
Last month alone, the Chinese government approved 500 billion yuan (US$71.4 billion) specifically for disease prevention to finance smaller enterprises on top of the 300 billion yuan relending quota authorized earlier by the PBOC.
This explains why there have been so few bounced checks and nonperforming loans, although this is only delayed by the policy.
The notice also urged adopting a “green channel policy” to expedite the review and approval processes for bonds issued to raise funds for epidemic prevention and control.
Data compiled by Shanghai-based financial information provider Wind Information Co showed that 249 corporate and municipal bonds for epidemic prevention and control were issued last month, with a total nominal value of 187.212 billion yuan.
It is bewildering as to who could afford to buy these bonds at the moment.
In compliance with government policy, Chinese banks have long been forced to buy municipal bonds, and this time is no exception. The banks not only have to provide underwriting services for bonds issued to fight the disease, but are also the main subscribers.
To add to their woes, interest rates on the bonds, issued to fight the disease, are only about 2 to 3 percent, far lower than other bonds.
Moreover, many of these bonds are not necessarily related to disease control.
Banks bearing municipal bonds have long been considered a major source of systemic risk in China’s financial sector.
China’s stock markets offer a clue as to whether its banks can continue to bear the burden.
Among the 36 banks listed on the A-shares market, 27 saw their share prices plunge below the price-to-book ratio.
This dire performance reflects the lack of investor confidence in the banks’ financial reports and asset quality, which are deeply affected by the bad debt imposed upon the banks.
As it resorts to the old habit of forcing banks to bear debt in an attempt to recover from the outbreak, the Chinese government is surely at its wits’ end.
Honda Chen is an associate research fellow at the Taiwan Academy of Banking and Finance.
Translated by Chang Ho-ming
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