China risks bank­ing cri­sis

> Warn­ing signs that it could hap­pen within three years, warns Bank for In­ter­na­tional Set­tle­ments

The Sun (Malaysia) - - SUNBIZ -

SHANG­HAI: Ex­ces­sive credit growth in China is sig­nalling an in­creas­ing risk of a bank­ing cri­sis in the next three years, a re­port from the Bank for In­ter­na­tional Set­tle­ments (BIS) says.

An early warn­ing of fi­nan­cial over­heat­ing – the credit-to-GDP gap – hit 30.1 in China in the first quar­ter of this year, the fi­nan­cial watch­dog said in a re­view of in­ter­na­tional bank­ing and fi­nan­cial mar­kets pub­lished on Sun­day.

Any level above 10 sig­nals a cri­sis “oc­curs in any of the three years ahead,” the BIS said. China’s in­di­ca­tor is way above the sec­ond high­est level of 12.1 for Canada and the high­est of the coun­tries as­sessed by the BIS.

Debt has played a key role in shoring up China’s eco­nomic growth fol­low­ing the global fi­nan­cial cri­sis. Out­stand­ing debt reached 255% of GDP in 2015, fu­elled in large part by a surge in cor­po­rate bor­row­ing, up from 220% just two years ear­lier.

China’s bank lend­ing in Au­gust more than dou­bled from the pre­vi­ous month, with much of the gain down to strong mort­gage de­mand.

In­deed, China’s top banks are lend­ing more to home­buy­ers and de­vel­op­ers than at any time since at least the global fi­nan­cial cri­sis.

The credit-to-GDP gap takes into ac­count the cur­rent credit-to-GDP and ex­pected long-run trends. But a China strate­gist at an in­ter­na­tional hedge fund said in­ter­na­tional his­tor­i­cal ex­pe­ri­ence is not nec­es­sar­ily ap­pli­ca­ble to China. The strate­gist could not be iden­ti­fied as he is not au­tho­rised to speak to the media.

The BIS also said the es­ti­mated debt ser­vice ra­tio, which mea­sures prin­ci­pal and in­ter­est pay­ments rel­a­tive to in­come, is at 5.4, which is a “po­ten­tial con­cern”.

This un­der­lines the de­fault risk as bor­row­ers strug­gle to re­pay loans. Some an­a­lysts ar­gue a weak­en­ing in banks’ cap­i­tal strength raises the prospect that the gov­ern­ment may have to in­ject more than US$100 bil­lion (RM413 bil­lion) to shore them up.

De­spite the con­cerns sur­round­ing China’s debt, UBS an­a­lysts said in a re­port ear­lier this year that they do not ex­pect an im­mi­nent bank­ing cri­sis.

A high do­mes­tic sav­ings rate, un­der­de­vel­oped cap­i­tal mar­kets, a rel­a­tively closed cap­i­tal ac­count and gov­ern­ment own­er­ship of banks and many large bor­row­ers mean no one can eas­ily “pull the plug” on its credit cy­cle, they said.

Debt-to-GDP could reach 300% be­fore 2020, UBS said. – Reuters

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