China told to combat debt problem or face banking crisis

Jake Cordell
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A Chinese man walks past a billboard of a new district in Shanghai
Fears have been raised over the resilience of the Chinese banking sector this week (Source: Getty)

Ratings agency Fitch has added its voice to mounting concerns about financial instability in the Chinese economy.

Hot off the back of a Bank for International Settlements (BIS) report which suggested the banking system was crippling under the most excessive credit burden faced by any country in the world, Fitch has told the Chinese authorities to start reining in excessive lending.

“The rebalancing of China’s economy has not so far involved a move away from dependency on rapid credit growth,” said a team of researchers led by Jonathan Cornish, managing director of financial institutions at Fitch’s Hong Kong office.

China’s strict adherence to growth targets could be fuelling the problem, Fitch suggested, as “policymakers will continue to rely on credit growth to meet near-term GDP targets. [This] will increase the size of asset-quality problems in the financial system.”

China’s debt-to-GDP ratio stood at 243 per cent at the end of 2015, but could rise to 269 per cent within three years if debt continues to expand.

Renminbi-denominated loans are growing at a rate of 13 per cent per year, according to the latest statistics, compared to official data which shows the economy expanding somewhere between 6.5 and seven per cent.

The authorities, moreover, seem to be denying the problems with the quality of loans being taken out, Fitch implied. While it estimates up to 21 per cent of the stock of loans are classified as “non-performing”, meaning debtors are in areas or facing considerable pressure in making repayments, the government puts the figure at just 1.8 per cent.

If such trends continue, Fitch believes there is heightened risk that the government will need to step in to help cool the situation, either by writing off loans, reducing interest rates, extending repayment terms or offering some other form of debt relief.

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“Banks are likely to be central to any meaningful resolution of the debt overhang,” Fitch noted, “and will probably need to absorb a significant portion of any losses.”

While the report will fuel concerns about the possibility of a hard landing in the world’s second largest economy, some are less convinced. Hao Zhou, a senior economist at Commerzbank’s Singapore office told City A.M. the weakness in the Chinese finance industry lies in the shadow banking sector. “I don’t buy they view that this will trigger a banking crisis,” he said.

“The size [of shadow banking] is about 12 to 15 per cent of the overall banking [industry] and most of the shadow banking assets are related to bonds and cash products, which is seen as a low-risk product.”