Fitch Warns Over Massive China Credit Bubble
Fitch Ratings, the global credit ratings agency, has warned that the extent of credit in China has become so extreme that the country would find it very hard to grow its way out of such excesses as in the past, triggering fears of tougher economic times on the horizon.
“The credit-driven growth model is clearly falling apart,” comments Charlene Chu, Fitch’s Senior Director in Beijing, as reported by the Daily Telegraph. “This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation. There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signaling.”
While the non-performing loan rate of the banks may look benign at just 1 percent, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit.
“It means nothing if you can offload any bad asset you want. A lot of the banking exposure to property is not booked as property,” adds Chu.
Fitch also warned that wealth products worth US$2 trillion of lending are in reality a “hidden second balance sheet” for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses. Chu said the banks had been forced to park over US$3 trillion in reserves at the central bank, giving them a “massive savings account that can be drawn down” in a crisis, but this may not be enough to avert trouble given the sheer scale of the lending boom.
“This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said. However, Chu still thinks the government can handle any banking crisis, no matter how bad.
“The Chinese state has a lot of firepower. It is very able and very willing to support the banking sector. The real question is what this means for growth, and therefore for social and political risk.”
Signals that all is not well
Overall credit in China has risen from US$9 trillion to US$23 trillion since the Lehman crisis, essentially replicating the entire U.S. commercial banking system risk in just five years.
The ratio of credit to GDP has jumped by 75 percentage points to 200 percent of GDP, compared to roughly 40 points in the US over five years leading up to the sub-prime bubble.
Bank Everbright defaulted on interbank loans on June 6, 2013.
A string of disappointments in Qingdao, Ordos, and Jilin within the US$1.4 trillion segment of the shadow banking system referred to as “trust products.”
Banking experts at Societe Generale say the debt service ratio of Chinese companies has reached 30 percent of GDP, the typical threshold for financial crises.
China Securities Journal says total credit in the financial system may be as high as 221 percent of GDP, and Chinese companies will have to pay out an estimated US$1 trillion in interest payments alone this year.
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