17 August 2017BanksChina banksBanking / FinanceBanksIndustry UpdateAsiaChinaIndustryChina banksDate17 August 2017Deutsche BankMarkets ResearchChina's consumer debt boomChina short-term consumer debt takes offWe value Chinese banks using a three-stage Gordon Growth Model (PV= (ROE-g)/(COE-g)), with target prices based on 2017Ebook value. Downside risk: property pricecorrection. Upside risk: removal or softeningof GDP targeting. (see p16-17 for details)Over the past 2 years mortgage growth in China has surged supporting a buoyanthousing market & helping partially clear the significant property oversupply issuemany 2nd and 3rd tier cities faced. In the past 3-4 months another phenomenonhas started to emerge which is equally interesting: Short-term consumer debt inChina has started to surge. During Q2 17 household debt with a duration of lessthan one year accelerated & is now growing +34-35% yoy (faster than mortgagegrowth) and currently makes up close to 9-10% of all net new credit provisionwithin China (a level we have not seen before). This, if it persists, could representanother interesting and important investment theme with implications beyondsimply the bank sector. It is not yet clear where exactly this short-term credit isbeing deployed in the economy but we note that historically 70-80% of this debthas been credit card related. Consumer credit in China (mortgages & other types)is now growing at a pace that has rarely been seen in other economies and has thepotential to provide a notable short-term boost to consumption/GDP. China hasnever really had a "consumer credit cycle" before so the question as to whetherthe banks can manage consumer credit risk effectively is likely to be tested atsome stage in the next few years.Linking to our key China bank thematics: Debt redistribution, not deleveraging.One of our key themes for investing in the China banks space has been thebelief that China's debt load needs to be viewed through the lens of 3 differentbalance sheets: corporate, government & household. Whilst China attempts todelever the corporate sector it would be a necessity to see a significant rise inleverage amongst both the household & government sector to maintain growthat the targeted 6.5%. This is indeed happening. We estimate that since its Q116 peak total corporate debt has declined from 169% of GDP to 165% at theend of H1 17. More of a "stabilization" than a significant reduction. Household& government debt combined however have risen by c8-9% of GDP, more thanoffsetting the decline in corporate leverage. So when viewed in aggregate China isstill leveraging up apace. The good news is the consumer & government balancesheets have the capacity to leverage up for a number of years yet. However at thecurrent pace household debt to GDP may breach 60% by the end of the current5 year plan (2015-2020). Beyond this as consumer debt reaches 70-80% of GDPits benefits on growth may reverse & become more of a headwind.Stephen Andrews, CFAResearch Analyst+852---2203 6191Hans Fan, CFAResearch Analyst+852-2203 6353Jacky ZuoResearch Analyst+852-2203 6255Edward DuResearch Associate+852-2203 6185Top picksChinaConstruction Bank(0939.HK),HKD6.66BuyAgri. Bank of China (1288.HK),HKD3.66BuyICBC (1398.HK),HKD5.65BuyBank ofCommunications(3328.HK),HKD5.73BuyBank of China (3988.HK),HKD3.95BuySource: Deutsche BankDeutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should considerthis report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONSARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.Distributed on: 17/08/2017 12:57:09 GMT0bed7b6cf11c 17 August 2017BanksChina banksWhy are we writing this report? Explosion in Chineseshort-term debt growthThe charts below caught our eye recently and if this trend continues it mayhave significant investment implications for Chinese stocks (beyond simply thefinancials space). It shows an explosion in growth in short-term consumer creditin China over the last 1-2 quarters. This is now growing +35% yoy and if currenttrends persist could accelerate to c.+40% yoy by the end of this year (short-termis typically defined as sub-1 year duration). We had grown used to seeing therising importance of mortgages within China's credit mix in recent years, but asthis has dipped back a little it is short-term consumer credit that has begun to fillthe gap. In this report we explore this potential new theme in a little more detailas well as the much hyped concept of China's "deleveraging" and put this in thecontext of China's overall debt load.Figure 1: Rolling 3 month absolute growth in China short-term consumer debt (RMB mn)-100,0000100,000200,000300,000400,000500,000600,000700,000Source: Deutsche Bank, CEICFigure 2: Short-term consumer debt as percen