A new round of bailouts of China’s banks on the horizon?
Wei Gu of Reuters writes in the IHT that “China banks could face credit crisis of their own,” a topic that has been pretty quiet since the big Chinese bank bailouts of a couple of years ago, in response to a mountain of bad debt that had accumulated by 2006:
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…
The nonperforming loan ratio for major Chinese banks rose for the first time in two years, to 6.72 percent in the fourth quarter from 6.63 percent in the previous quarter. That level is dwarfed by the 20 percent to 50 percent 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.”…
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…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 percent 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.
China’s banks have very high stock market valuations for their size, and of course the central government is flush with foreign exchange reserves, both of which factors could mitigate a new set of debt problems for China’s banks, even if those problems were as large as the largest estimates of a couple of years ago.
But, as noted in an AP story from the middle of last year: “’The banking system is still based on collateral and the collateral is all overvalued,’ says Andy Xie, an independent economist based in Shanghai and Hong Kong. ‘If the bubble bursts, then you will have a banking crisis like Japan in 1990…The question is how China can manage after the bubble’.”
April 7th, 2008 at 9:32 am
Indeed. Back in November 2006, Han commented on Jack’s Milton Friedman eulogy:
I added:
Time will tell. Meanwhile, recent stewardship of the US economy has been flawed, and it’s not out of the question that it will worsen after the election.