Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

China's bull-market days are numbered and you can blame Beijing for ushering a panda bear into the fray. 

A slew of measures against shadow banking and capital outflows are hitting corporate borrowing and bank earnings head on. The result has been a decline in leverage and the lowest return on equity in almost a decade. Given the acceleration of these actions, year-end reports won't be pretty.

Eastern Promise
Shanghai stocks are losing their luster with return on equity at the lowest since September 2006
Source: Bloomberg

Lenders are particularly affected, and they comprise 19.6 percent of the Shanghai Composite Index. The People's Bank of China has quietly hiked short-term rates, causing a bear flattening of the local swaps curve, in a bid to curb shadow banking.

Flat Out
The PBOC has pushed short-term rates higher while longer ones have held steady -- bad news for bank margins
Source: Bloomberg

As Gadfly has pointed out, when that happens, financial institutions' bottom lines are impacted, given they tend to borrow short and lend long. Because state-owned banks lend more, they may be walloped the hardest.

It's not like Chinese lenders' profits are booming, either. Rising nonperforming loans and the shadow-banking crackdown have taken their toll.

Taking the Low Road
ICBC's trailing 12-month net interest margin has dipped sharply over the past 12 months
Source: Bloomberg

Less profitable banks lend less. Loans to nonfinancial corporations have increased just 8.25 percent this year, on track for their slowest yearly expansion since the People's Bank started publishing the data in 2007.

Drop Off
The rate of advances to corporations in China sank to just 8.25 percent this year
Source: Bloomberg

Bonds, while still widely available, are becoming more expensive for borrowers as well. The premium for three-year AAA rated notes over sovereign debt widened to a 17-month high of 112 basis points on Dec. 6.

As loans becomes pricier and scarcer, companies will have to rely more on equity and operating cash, which might be good news for those who believe China is over-leveraged.

Traditional finance theory, however, states that with an increase in leverage, earnings too rise. The opposite is also true, meaning profits are in real jeopardy here.

As analysts adjust their expectations for corporate China, stock prices may have to adjust as well. Once again, Beijing's panda may stop any bulls mid-charge.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net