China bank crisis unlikely, says report
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Despite its vulnerabilities, the Chinese banking system is unlikely to fall into crisis due to the buffers currently in place, according to the latest report from Exclusive Analysis.
Exclusive Analysis cites a recent study by Fitch, the ratings agency, which says Chinese banks have a 60% chance of suffering a crisis by the middle of 2013.
Fitch observes credit in China has grown at a rapid pace - 15% a year over the last two years. Property prices have risen more than 5 percentage points a year faster than the overall rate of inflation.
Exclusive Analysis says bad loans could become a vulnerability for the banks. There is also a strong possibility they will exceed their 2011 lending targets.
However, Exclusive Analysis argues China has more than enough firepower to intervene in its banks should they experience any difficulties, including $3 trillion in foreign currency reserves.
“Even a crisis on the scale of 1998-2000 would do no more than offset the reserve growth of a single year at the 2010 pace,” the report says.
“Increased reserve ratio requirements, recent loan transfer provisions and substantial bank profits mean that larger banks are likely to be able to absorb much of these non-performing loans.”
Exclusive Analysis also discusses a Citigroup report which points out residential property investments currently consume 6.1% of China’s GDP, the same as in America in 2005 prior to the subprime crisis.
However, the research firm says China has already intervened in the property market to limit the problem. According to Exclusive Analysis, domestic property remains attractive in China because the nation still restricts its residents’ investments abroad.
Chinese cash deposits also offer negative rates of interest in real terms, the report says, increasing incentives to invest in and rent out properties.
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