China's total social financing peaked in January at RMB2.5t: Barclays

Find out what other risks loom for China.

Barclays recommended staying positive on China banks in December, but now the analyst is turning more defensive.

"We now highlight risks that could cap the upside such as financing having peaked, regulatory tightening and potential interest rate deregulation in 2H13."

Here's more from Barclays:

Expect 2012 results to be good – possibly better than consensus – serving as a potential near-term catalyst: We expect H-share China banks to post strong profit growth of 17% y/y in 2012E on average, or 10% y/y for 4Q12E, driven mainly by sequentially stable NIMs and steady credit charges.

We raise our forecasts 3% on average for 2012 and 4% for 2013 to reflect the better NIMs, lower credit costs and benign asset quality. We believe good earnings may be the last short-term positive sector catalyst.

Financing has peaked; risks related to tightening regulations and interest rate deregulation in 2H13 increasing: Total social financing peaked on a monthly basis in January 2013 at RMB2.5tn, in our view.

We see an increasing potential for risks in the "normalization" of liquidity as well as the tightening of regulations on LGFV financing and shadow banking. Potential interest rate deregulation could also be a risk in 2H13.

Adjust portfolios amid any potential rally during the results season: Going into the results season, we are moving to a more defensive stance on H-share China banks.

Although we believe there could still be some upside from current undemanding valuations, we expect bank stocks to be range-bound near-term. We view any potential rally into the full-year 2012 results in late March as an opportunity to make defensive adjustments to portfolios.

Key risks to our defensive view: The key potential upside risks, we see, include: 1) the new government initiating significant reform measures that could benefit China's mid- to long-term economic growth; 2) significant improvement in the US/European economies; and 3) significantly better-than-expected bank earnings growth in 2013.

Downside risks include: 1) higher-than-expected inflation leading to accelerated monetary tightening; 2) abrupt regulation tightening on shadow banking/WMP leading to rising bankrupts of SMEs and corporate; and 3) earlier-than-expected interest rate deregulation.