China was the first country to return to growth, with GDP up 3.2% in Q2 compared with the same period last year. However, the health crisis did not spare the banking sector, which recorded its worst performance in 10 years this year.
Towards a gradual recovery for the Chinese economy
China is the first country to post positive economic growth in the wake of the epidemic. The Asian giant's GDP reached 3.2% in Q2 2020, following a 6.8% collapse in Q1. In just 3 months, GDP has therefore rebounded by 11.5%, according to official data published in July.
This upturn was mainly due to a recovery in supply. As factories reopened and employees returned to work, manufacturing output grew rapidly. The Purchasing Managers' Index (PMI) for the manufacturing sector defined by IHS Markit stood at 53.1 points in August, compared with 52.8 points in July. While manufacturing activity is expanding strongly, consumption remains the weak link. Retail sales fell by a further 1.8% year-on-year in June. Domestic consumption has been impacted by wage cuts, layoffs and fears of a second wave.
Economic stimulus measures affected bank profitability
The measures put in place by Beijing to relieve companies and save jobs (deferral of loan repayments, fee reductions, etc.) have had an impact on China's major banks.
China's leading international commercial bank, Bank of China (BOC), recently reported net profit down 13.1% year-on-year in Q1, to 100.9 billion yuan. Non-performing loans rose to 1.42% of total loans, compared with 1.37% last year.
Meanwhile, Industrial and Commercial Bank of China (ICBC) saw its net profit plummet to 148.7 billion yuan year-on-year, down 11.2%. The bank claims to have supported the economy during the health crisis by cutting fees and rates for its customers. As a result, bad debts reached 269.9 billion yuan in the 1st quarter.
Lastly, Agricultural Bank of China (ABC) posted a net profit of 108.8 billion yuan, down 10.3% year-on-year, while China Construction Bank, the country's second-largest bank in terms of assets, posted a net profit of 137.6 billion yuan, down 10.7% year-on-year.
The financial news agency Bloomberg points out thatthis is the worst performance in the banking sector for 10 years. According to Bloomberg, the profits of China's major banks could fall by as much as 20-25% by 2020.