According to a report by S&P Global Ratings, the majority of banks in China are anticipated to withstand pressures arising from tariffs.
The ratings agency suggests that a government injection plan will likely bolster the loss-absorption capacity of megabanks, allowing them to maintain their current capitalization assessments. However, S&P indicated that regional banks located in coastal provinces are expected to face more significant strain. The report added that a stabilizing factor for most rated banks is their geographically diverse portfolios across the country.
In a stress-test scenario conducted by S&P, the most significant difficulties are predicted to arise from loans to inclusive micro and small enterprises (MSEs). These businesses are considered vulnerable due to their low-profit margins and restricted financial capacity to handle major changes in business activity. S&P projects a nonperforming asset (NPA) ratio of 20% for loans to this sector.
Further financial strain could emerge from trade finance, specifically from discounted bills lending, for which S&P forecasts a 5% NPA ratio. This figure is considered notably high, as defaults on such loans are typically rare because the counterparty is usually another financial institution. Nevertheless, S&P also pointed out that a significant share of these discounted bills originates from domestic trade, which is less exposed to the impact of increased U.S. tariffs.
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