Executive Summary

1. Advanced economies continued to post upbeat economic performance in Q1 2018, resulting in their lowest-ever credit risks since the eruption of the global financial crisis. With a generally stable RMB exchange rate and increased foreign exchange reserves, China’s external financial pressures were relatively stable in Q1 2018, but we need to closely follow the foreign exchange rate shocks caused by the U.S. dollar rebound.

2. In Q1 2018, deleveraging continued to make steady progress. While the aggregate real-economy leverage ratio slightly increased, government and financial sector leverage ratios decreased. The new regulations on asset management businesses further propelled the deleveraging process.

3. Growth of non-cash payment instruments in the payment and clearing system slowed significantly, and growth of business turnover far exceeded growth of trading value. Growth of personal bank settlement accounts continued to slow, resulting in a reduction in the overall growth of bank settlement accounts.

4. After the growth of bank size continued to slow near the end of 2017 and asset quality remained unchanged for three quarters, the NPL ratio and the balance of NPL both increased once again. Despite a slight increase in profit growth, average return on assets and average return on capital both increased compared with the previous year, which shows an increase in banking sector profitability under the tight regulatory environment.

5. Despite some volatility at the second-highest historic level, the credit spreads of credit products of various grades in China’s bond market reduced compared with the beginning of the year. Some signs of recovery have emerged in the bond market: the credit spreads of various maturities changed slightly in the beginning of 2018, with long-term corporate bonds outperforming short-term and mid-term corporate bonds.

6. In Q1 2018, the rent capitalization rate of Tier-1 cities remained stable; the rent capitalization rate of Tier-2 cities ceased to increase; and the rent capitalization rate significantly reduced for Tier-3 cities, where real estate inventory greatly increased and additional risks were revealed.

...