China, the new champion of free trade, is getting serious about dangers in its financial system.
China, Canada and Hong Kong are among the economies most at risk of a banking crisis, according to the Bank for International Settlements. Household borrowing is seen as a key risk for China and Hong Kong.
Government-led stimulus has been a key driver of China’s economic growth since late 2008. Along with that, the country has also built up a mountain of debt at nearly 300% of gross domestic product (GDP) compared with around 140% before the global financial crisis.
Driven by low interest rates, the major driver of China’s credit growth has been household debt, expanding by an average of 19% a year since 2011. At this pace, it could more than double the current level and potentially be 70% of GDP by 2020 versus 30% in 2013.
The banking sector has ballooned, too, with wealth management products (WMPs) tripling to $4.2tn as they offer higher yields. The rapid unwinding of trades funded with margin debt fuelled the $5tn equity market slump of 2017.
While, China is grappling with its debt mountain, global shadow banking assets continue to surge, propelled by investors eager for higher returns in a low interest rate world. Assets that pose risks to the financial system grew 7.6% to $45tn in 2016 compared with a total global financial assets of $340tn, says the Financial Stability Board.
China’s traditional banks are a big driver of shadow banking, contributing to the breakneck growth of WMPs, opaque investments that have drawn parallels with Western lenders’ exposures in the subprime crisis.
However, China last year added WMPs to its required health checks for banks and, as part of a broader crackdown on financial risk, announced a sweeping plan to rein in shadow banking. That’s already having an impact: WMP growth has slowed and the issuance of another popular investment — trust products that are seen as even riskier — has fallen sharply in 2018.
China has also adopted derisking as the government’s mantra since 2015 with a more recent focus on reining in household debt. The country’s most powerful politicians have been ramping up directives on everything from shadow banking to stock-market speculation.
A key warning indicator known as China’s credit-to-GDP “gap” showed an improvement, said the BIS. This may suggest the country is making progress in its push to reduce financial-sector risk.
China’s biggest companies are healthier than they’ve been in years. The improvements could help ease fears of a looming financial crisis in China, even though smaller Chinese companies have made less progress so far.
Communist China has stepped in to champion the cause of globalisation and free trade in the face of US President Donald Trump’s policies of protectionism and inward-looking isolation. But systemic risks in the world’s second largest economy may make it the biggest threat to global financial stability, according to a September 2017 QNB report.
Make no mistake, how China’s economy, which is forecast to reach about $13.2tn in 2018, fares brings about dire consequences across the world.
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