Credit losses may hit $3 tril­lion, bank says

Gold­man Sachs re­port warns of ‘shadow bank­ing’ risk ele­ments

China Daily (Hong Kong) - - BUSINESS - By WANG XIAO­TIAN wangx­i­ao­tian@chi­nadaily.com.cn

China might face credit losses of up to 18.6 tril­lion yuan ($3 tril­lion), be­cause the speed of its credit ex­pan­sion has ex­ceeded that seen prior to other credit crises in his­tory, Gold­man Sachs Group Inc has warned.

In a re­port dated Aug 5, it said the rapid pace of China’s credit ex­pan­sion, in­creas­ingly sourced from the in­her­ently more risky and less trans­par­ent “shadow bank­ing” sec­tor, has be­come a top con­cern for global mar­kets.

“Our Asian econ­o­mists and strate­gists re­cently pub­lished a com­pre­hen­sive look at this con­cern and its im­pli­ca­tions for eco­nomic growth and as­set per­for­mance in China, cal­cu­lat­ing that an ex­treme up­per­bound for to­tal China credit losses could amount to 18.6 tril­lion yuan,” the re­port said.

But ac­tual credit losses are likely to be sig­nif­i­cantly lower than th­ese worst-case fig­ures, emerge grad­u­ally and be par­tially ab­sorbed by bank earn­ings or other av­enues, it added.

“There is am­ple room on the sov­er­eign bal­ance sheet to pro­vide sup­port, if re­quired,” the re­port said.

It said com­mod­ity de­mand and prices, emerg­ing mar­ket eco­nomic growth and as­set per­for­mance would be most at risk from any fall­out from China, while some United States as­sets, es­pe­cially US do­mes­tic­fac­ing eq­ui­ties, rates and the dol­lar could po­ten­tially rise.

Helen Zhu, Gold­man Sachs’ chief China eq­uity strate­gist, said parts of the cor­po­rate sec­tor are the great­est source of credit risk, es­pe­cially sec­tors with ex­cess ca­pac­ity, along with lo­cal govern­ment fi­nanc­ing, while the un­in­tended con­se­quences of in­ten­tional pol­icy tight­en­ing could cause things to go bad.

The im­pact on eco­nomic growth and as­set per­for­mance will de­pend highly on govern­ment ac­tions, she said, be­cause the more proac­tive the na­tion is in tack­ling re­forms, the more neg­a­tive are the im­pli­ca­tions for near-term growth and as­set re­turns but the more pos­i­tive over the medium term.

Fig­ures from Fitch Rat­ings show that the credit-to-GDP ra­tio of China was close to 200 per­cent at the end of 2012, up by 70 per­cent­age points in four years.

Charlene Chu, a se­nior di­rec­tor in the fi­nan­cial in­sti­tu­tions group at Fitch, said that by the end of this year, bank­ing sec­tor as­sets will have in­creased about $ 14 tril­lion from the end of 2008, amount­ing to the en­tire US com­mer­cial bank­ing sec­tor.

To­tal so­cial fi­nanc­ing of the world’s sec­ond-largest econ­omy in the first half ex­ceeded 10 tril­lion yuan, up more than 30 per­cent year-on-year, ac­cord­ing to cen­tral bank fig­ures.

Louis Kuijs, chief China econ­o­mist at the Royal Bank of Scot­land Group, said a sys­temic fi­nan­cial cri­sis one that over­whelms the econ­omy and the fi­nan­cial sys­tem is less likely in China, al­though over­all lend­ing as a per­cent­age of GDP is rather high for a coun­try of China’s level of de­vel­op­ment.

A Stan­dard & Poor’s Rat­ings Ser­vices re­port said a sys­temic threat to China posed by rapid ex­pan­sion of shadow-bank­ing ac­tiv­i­ties may be sev­eral years away, if it emerges at all.

“We be­lieve ma­jor Chi­nese banks’ cap­i­tal­iza­tion, earn­ings and liq­uid­ity pro­files pro­vide a com­fort­able buf­fer to ab­sorb any pos­si­ble hit from shadow bank­ing and credit risks in the Chi­nese econ­omy,” said S&P’s credit an­a­lyst Ryan Tsang.

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