Could credit crisis of Chinese banks rock global markets?
Saturday, 15 March 2008
Wei Gu
Banks in China seem to have dodged a bullet in the U.S. subprime mortgage crisis. Chinese lenders accumulated large amounts of that bad debt. But bankers have assured investors they are within manageable levels that won't greatly affect their profit, fattened by a domestic economy that is growing at double-digit rates.
But that doesn't mean China will be able to avert a credit crunch of its own making. In fact, risks are growing of a credit crisis with Chinese characteristics. A crisis like that could rock global markets, because China has been one of the few bright spots in the world economy.
With memories still fresh of Beijing's having injected more than $260 billion into its banks while shifting bad loans off their books, another huge bailout may become necessary if loose lending practices are not halted.
What could trigger such a turnaround in the Chinese credit market? A sudden sharp slowing of the Chinese economy. That's not as far-fetched as it might seem. Weaker overseas demand and the bursting of an asset bubble in China could result in defaults by droves of companies.
Sudden deflation of a bubble can lead to fast-deteriorating asset quality, cascading in a chain reaction through the financial system, as has happened in the United States.
Warning lights are already flashing. The nonperforming loan ratio for major Chinese banks rose for the first time in two years, to 6.72 per cent in the fourth quarter from 6.63 per cent in the previous quarter. That level is dwarfed by the 20 per cent to 50 per cent nonperforming loan ratios six years ago, but the trend is worrisome.
"History shows even the worst banking systems can appear decent during periods of robust GDP growth," said Charlene Chu, a senior director at Fitch Ratings. "Fitch remains concerned Chinese banks could well be underestimating potential future credit losses."
Chinese banks have benefited from a foreign investment wave and an explosion of credit. Robust lending growth has lifted profits but also kept bad debt ratios artificially low by inflating the denominator - overall loans.
As American financial institutions discovered the hard way, a rapidly growing loan base can suddenly explode if no one is paying attention to the quality of the loans.
The World Bank expects China to grow this year at its slowest pace since 2002. And with inflation hitting 11-year highs, the central bank needs to clamp down on lending.
"It is worth watching whether Chinese banks can pass this test," said Mingchun Sun, Lehman's China economist. "It is impossible that when the economy and earnings go down, bad debt will not go up."
While reckless lending to home buyers brought some American banks to their knees, loans to exporters and property developers are threatening to do the same to Chinese banks.
Caught between an appreciating yuan, weaker global demand and rising costs at home, exporters are facing the toughest time in 20 years. In the Guangdong area near Hong Kong, about 12,000 exporters are likely to go bankrupt early this year, according to the Shenzhen OEM Association, an industry group.
Signs are also suggesting that loans to real estate developers may go awry. After investors got used to rising housing prices, they are suddenly falling by double digits in certain cities.
The recent sell-off in the Chinese stock market -- down 25 per cent in the past four months -- could also hobble banks because a big chunk of their business comes from equity-related products. A fair amount of corporate lending found its way into the stock markets, and that money might have evaporated already.
Chinese banks dominate the list of the world's most valuable banks, thanks to strong demand for a limited amount of shares, which distorts their valuations. But judging by banks' ability to manage their risks, they are hopelessly small and far behind. If current trends continue, before long many of those mighty banks might have to ask Beijing again for billions of dollars in bailouts.
..............
Reuters
Banks in China seem to have dodged a bullet in the U.S. subprime mortgage crisis. Chinese lenders accumulated large amounts of that bad debt. But bankers have assured investors they are within manageable levels that won't greatly affect their profit, fattened by a domestic economy that is growing at double-digit rates.
But that doesn't mean China will be able to avert a credit crunch of its own making. In fact, risks are growing of a credit crisis with Chinese characteristics. A crisis like that could rock global markets, because China has been one of the few bright spots in the world economy.
With memories still fresh of Beijing's having injected more than $260 billion into its banks while shifting bad loans off their books, another huge bailout may become necessary if loose lending practices are not halted.
What could trigger such a turnaround in the Chinese credit market? A sudden sharp slowing of the Chinese economy. That's not as far-fetched as it might seem. Weaker overseas demand and the bursting of an asset bubble in China could result in defaults by droves of companies.
Sudden deflation of a bubble can lead to fast-deteriorating asset quality, cascading in a chain reaction through the financial system, as has happened in the United States.
Warning lights are already flashing. The nonperforming loan ratio for major Chinese banks rose for the first time in two years, to 6.72 per cent in the fourth quarter from 6.63 per cent in the previous quarter. That level is dwarfed by the 20 per cent to 50 per cent nonperforming loan ratios six years ago, but the trend is worrisome.
"History shows even the worst banking systems can appear decent during periods of robust GDP growth," said Charlene Chu, a senior director at Fitch Ratings. "Fitch remains concerned Chinese banks could well be underestimating potential future credit losses."
Chinese banks have benefited from a foreign investment wave and an explosion of credit. Robust lending growth has lifted profits but also kept bad debt ratios artificially low by inflating the denominator - overall loans.
As American financial institutions discovered the hard way, a rapidly growing loan base can suddenly explode if no one is paying attention to the quality of the loans.
The World Bank expects China to grow this year at its slowest pace since 2002. And with inflation hitting 11-year highs, the central bank needs to clamp down on lending.
"It is worth watching whether Chinese banks can pass this test," said Mingchun Sun, Lehman's China economist. "It is impossible that when the economy and earnings go down, bad debt will not go up."
While reckless lending to home buyers brought some American banks to their knees, loans to exporters and property developers are threatening to do the same to Chinese banks.
Caught between an appreciating yuan, weaker global demand and rising costs at home, exporters are facing the toughest time in 20 years. In the Guangdong area near Hong Kong, about 12,000 exporters are likely to go bankrupt early this year, according to the Shenzhen OEM Association, an industry group.
Signs are also suggesting that loans to real estate developers may go awry. After investors got used to rising housing prices, they are suddenly falling by double digits in certain cities.
The recent sell-off in the Chinese stock market -- down 25 per cent in the past four months -- could also hobble banks because a big chunk of their business comes from equity-related products. A fair amount of corporate lending found its way into the stock markets, and that money might have evaporated already.
Chinese banks dominate the list of the world's most valuable banks, thanks to strong demand for a limited amount of shares, which distorts their valuations. But judging by banks' ability to manage their risks, they are hopelessly small and far behind. If current trends continue, before long many of those mighty banks might have to ask Beijing again for billions of dollars in bailouts.
..............
Reuters