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China’s over-indebted economy is facing growing risk of contagion, Liao Qiang, Beijing-based senior director for financial institution ratings at S&P Global Ratings, said.
Country’s smaller banks have never been more reliant on each other for funding, prompting rating companies to warn of contagion risks in any crisis. “The pace of the development is concerning. If this isn’t stopped in time, the central bank will lose some control and flexibility of its monetary policy”, he said.
Yiping said that “mining and property sectors have the highest leverage ratio” in the country and while the M2/GDP ratio is “not the best gauge to measure leverage for China” he notes that the “leverage ratios in state-owned companies have kept growing since 2008.”
The IIF data, according to which China’s gross leverage is now roughly 300% of GDP, confirms the reality of over-indebtedness.
China massively transfer its obligations to the government. Nevertheless it does not mean that the local banks are more stable as a result of their liabilities being effectively insured by the government.
Wholesale funds – notably those raised in the interbank market – accounted for a record 34% of small- and medium-sized bank financing as of June 30, compared with 29% on Jan. 31 last year, Moody’s Investors Service estimated in an Aug. 29 note that analyzed central bank data – According to Bloomberg. Shanghai Pudong Development Bank Co.’s first-half earnings showed its short-term borrowings and repurchase agreements surged by 75% in the past three years, while its consumer deposits rose just 24% .
“Policy makers have sought to sustain an economic recovery by keeping the seven-day repurchase rate at round 2.4 percent for the past year, a level that has encouraged borrowing for investment in property, corporate bonds or risky loans, often packaged as shadow banking products. CLSA Ltd. estimates total debt may reach 321 percent of gross domestic product in 2020 from 261 percent in the first half, while the Bank for International Settlements also warned lenders are at risk from surging leverage.”
The other issue are the China’s shadow banking problems that continue to grow: short-term borrowings and repos accounted for 37% of Industrial Bank Co.’s total liabilities as of June 30, up from 34% three years ago, according to its filings. The lender’s loan-to-deposit ratio rose to 73.8 percent, from 67.8 percent at the end of 2015. The ratio for Hong Kong banks’ local currency business was 78.2 percent on June 30, while that for Australian lenders was 114.9 percent, according to official data.
Christine Kuo, a Hong Kong-based senior vice president at Moody’s emphasised that the higher the reliance on wholesale funds, the greater the risk of a liquidity crunch.
“When banks face fund withdrawals by other financial institutions, this will in turn prompt them to call back their own funds,” she said.
The troubles of China’s banking system reveals the fact that it turns to rely on short-term and even overnight sources of funding.
Last week Bank of England in the Financial Policy Committee Statement from its policy meeting on September 20 warned that the capital inflows, loosening credit conditions may leave China at the risk of “a tightening in financial conditions”.
Credit growth in China continues to materially outpace GDP growth, and the level and growth of credit relative to GDP in China are very high by international standards. A crystallisation of these risks is an important element of the 2016 stress test of major UK banks; the results will be published alongside the Financial Stability Report in November.
The renowned economist Kenneth Rogoff, Professor at Harvard did not hide his worry over the situation in China.
“”Everyone says China’s different, the state owns everything they can control it,” Mr Rogoff said.
“Only to a point. It’s definitely a worry, a hard landing in China. We’re having a pretty sharp landing already and I worry about China becoming more of a problem.”