In terms of economic influence
and forward dated sentiment, China eclipses all other Asian countries
by a considerable margin. As the world’s second largest economy China
could surpass the US within the next decade, as the pace of domestic
deregulation and financial market reform accelerates.
It is for this reason that concern mounts over the long term
sustainability of Chinese economic growth. The potential knock-on
effect from a shock to the Chinese banking system would be disastrous
to the continued strength and stability of global capital markets
following the GFC.
Systemic risks posed by floating the Renminbi (RMB), curtailing the
fastest growing shadow banking system in the world and coping with
bulging bad loan provisions represent potential triggers for a new
financial crisis if not managed carefully.
Introducing a more flexible exchange rate will have a significant
impact on foreign exchange and capital flows. The ability to deliver
economic stimulus on an unfathomable scale is questionable against a
floating exchange rate, an issue the US Federal Reserve is currently
facing tapering Quantitative Easing.
Attempting to control shadow banking, encompassing the raft of largely
unregulated transactions that occur off the balance sheet, will also
define the ongoing success China has in balancing continued growth
against underlying stability.
Shadow banking has grown in an environment where officials are
attempting to prevent credit from overheating, while at the same time
maintaining an economic growth target over 7.5 percent.
Given the enormous scale of reported loan growth that is known, the
size and scope of unregulated shadow banking poses a significant
Saving is a defining characteristic of Chinese people. China exhibits
the third highest saving rate in the world, narrowly behind Qatar and
Savings as a percentage of
China’s US$9 trillion GDP currently sits at 50 percent – however this
level is falling quickly following an exceptional influx of debt and
relatively speculative investment in property and shares.
Kicking China’s new found
addiction to debt will not be a smooth process, given comparatively
low rates of consumption and never before seen transformation in
banking practices and processes.
The credit boom in China has been widely reported, yet Chinese debt is
now double the value of GDP without the consideration of widespread
shadow banking loans. The ability to service this debt will not be
achieved by simply ‘outgrowing’ it.
The Chinese banking sector's bad loan ratio moved higher in 2013, from
0.95 to 1 percent. US$10 billion in bad loans have been written off by
China’s largest banks, representing over 50 percent of total lending.
Harbin Bank, the fourth Chinese bank IPO on the Hong Kong exchange in
the last six months, raised equity through a pricing at the lower end
of the indicative range in an effort to improve the bank’s capital
A bellwether by definition ‘creates or influences’ those entities
around it, but also importantly serves as a signal for future events.
The term is derived from the ‘wether’ ram leading its flock of sheep
with a bell hung around its neck.
Businesses have enjoyed an extended period of relative harmony while
looking to China for guidance, given that falling growth is routinely
met with seemingly unending government stimulus.
Any wavering in China’s economic direction would be met with a swift
curtailment of continued growth and stability well beyond the borders
of the People’s Republic.
China has strived to align itself with global regulatory requirements
and capital adequacy ratios over the last five years, yet the
transition from an economic ‘underdog’ to that of a global leader
could become very bumpy as the year unfolds.