China's Coming Banking Crisis?

 
 

There was an interesting piece in the Wall Street Journal this week looking at a remark by an analyst with Fitch Ratings suggesting that China had a 60 percent chance of experiencing a banking crisis by 2013.

As the article notes, Fitch has developed a good reputation on China thanks in large part to one of its Beijing-based analysts, Charlene Chu, who in 2009 flagged ‘how Chinese banks were moving loans off their balance sheets to lightly regulated trust companies to avoid government lending caps.’

So where does the 2013 date come from? The agency rates national banking systems as falling into one of three categories, depending on what it describes as their Macro-Prudential Indicator scores; MPI 1 suggests the lowest risk, and MPI 3 the highest. Last June, the agency gave China an MPI 3 rating. Historically, the MPI 3 rating suggests that a crisis will occur within three years for an emerging economy such as China’s, with record lending and soaring real estate prices being cited by Fitch Ratings senior director Richard Fox as the key factors, according to Bloomberg.

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I asked Alistair Thornton, China analyst at IHS Global Insight, for his take on the 60 percent figure. He told me:

‘It’s undoubtedly clear that there are significant problems within the banking sector, problems that could threaten the sustainability of China's growth trajectory. That said, putting a 60 percent likelihood on a banking sector meltdown by 2013 is surely over-cooking it a touch.

‘There are indeed risks of a slow slide into stagnancy as necessary but painful reforms are sidelined by political and economic constraints. But it’s hard to see these playing out before 2013. And even after that, the risks aren’t high—although they're not low either.’

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