The growing problems in the Chinese banking system could spill over into a wider financial crisis, one of the most respected analysts of China’s lenders has warned.
Charlene Chu, a former senior analyst at Fitch in Beijing and now the head of Asian research at Autonomous Research, said the rapid expansion of foreign-currency borrowing meant a crisis in China’s financial system was becoming a bigger risk for international banks.
“One of the reasons why the situation in China has been so stable up to this point is that, unlike many emerging markets, there is very, very little reliance on foreign funding. As that changes, it obviously increases their vulnerability to swings in foreign investor appetite,” said Ms Chu in an interview with Britain’s The Telegraph.
Ms Chu has been warning since 2009 about the growth of a shadow banking system in China that has helped fuel the credit expansion seen in the country in the wake of the Western financial crisis. However, fears are growing that the build-up of foreign borrowing by the Chinese, particularly in US dollars, is creating an even greater build-up of risk than that seen before the crisis of 2008.
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Figures published by the Bank for International Settlements (BIS) in October showed foreign currency loans booked in China, as well as cross-border borrowing by Chinese companies, had reached $US880bn as of March 2013, up from $US270bn in 2009.
Analysts say this figure is now likely to exceed $US1 trillion and is continuing to grow, raising the prospect of the potentially dangerous vulnerability of the Chinese financial system to a rising dollar.
“It is very hard to work out the exposures of individual banks to the Chinese financial system, but it seems to us there are some very large numbers on some of the bank’s balance sheets,” said the analyst.
“Without a doubt, that has been on the rise [foreign currency borrowing] and was really starting to grow fast in the latter half of last year and it’s only going to continue. For the time being, it is only a fraction compared to the massive size of the financial sector, but still we’re talking about a growing amount of funding coming from offshore sources,” she said.
“You look at the exposure numbers from the BIS and the Hong Kong banks . .. you’re going to encounter a few [foreign] institutions that are going to have a sizeable exposure to China.”
George Magnus, senior independent economist at UBS, said the Chinese banking system resembled that of Japan during the 1980s in the years leading up to the country’s financial crash.
“If the dollar were to appreciate it could cause problems for those banks that have borrowed in dollars. Anywhere you have a banking system that uses a non-domestic currency, there is a possibility of a mismatch that could cause issues when the value of your liabilities runs away from you,” said Mr Magnus.
The BIS figures show foreign-currency loans are already at a decade high, though the body said there was no reason this should mean there was a “currency mismatch”.
The Telegraph, London