China banks no longer the main sources of long-term financing

They just provided 25% of financing to corporates in 2012.

According to Bernstein Research, disintermediation is taking place faster in China than most investors recognize. No longer are the banks the main sources of long-term financing. At the end of 2012, commercial banks provided just 25% of medium- and long-term financing to corporates in China, down from an average 70% over 2008-10. 

Here's more from Bernstein:

SOEs have gained increasing access to the corporate bond market for financing. Corporate bond issuance averaged RMB 237bn per month in H2 '12, up from RMB 108bn over 2009-H1 '12. In 2012, corporate  bonds outstanding grew by RMB 2.3 trillion to 15.2% of nominal GDP (up from 11.9% in 2011)

- The rapid growth in the corporate bond market was driven by both supply-side factors (e.g., lower financing costs) and demand-side factors (the sharp rise in AUMs at fixed income mutual funds and wealth management products).

Despite market perceptions, the banks have NOT been the major purchaser of these corporate bonds, having acquired just 14% of new issuance in H2 '12. Instead, "fund houses" (which include security funds and wealth management products) acquired 70% of the newly issued bonds.

The increased reliance of the SOE sector on corporate bonds has disintermediated the banks (especially the state-owned banks). But, the impact to profits is not as negative as one might expect. Like we have seen in other countries where disintermediation (and interest rate liberalization) occurred, the state-owned banks will only see a small decline in profitability as they increase exposure to private sector entities.

Our scenario analysis shows, if 40% of the current SOE clients of the state-owned banks migrate to the corporate bond market, the potential ROE of the banks will only decline by 130bp. In fact, in the near-term as credit costs to the new private sector enterprises remain below normalized levels, the profitability of the state-owned banks should be flat and may even improve slightly.