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.
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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Grant
I wish I could enjoy this but a China in crisis is a more defensive nation, not to mention the obvious impact on the U.S.
Anonymous
A Chinese crash would lead to a second Great Depression, an internatioanl one. It seems even the anti-China camp are aware of this.
yang zi
even if a crisis happens, banks will be saved instantly by the government.
Slow growth is good for China. it will expose a lot of problems and give China a chance to solve them. Authoritarian rule is one of the problems.
China will democratize in 10-20 years.
thomas
Certainly, there have been some serious problems with China’s export-oriented economic model! The coming down of the Titan would have grave repercussions not only for China itself but also for the whole world!!
http://www.canadianbusiness.com/managing/strategy/article.jsp?content=20110314_10024_10024&page=2
Jianwen
The Communist Party promotes markets that grow in its favour. Since China’s banks have been in a perpetual state of crisis and bailout (default and write-off) for the last 20 years (despite national economic growth), any increased effect from this “off-balance sheet lending” will remain hidden in the data.
Crises in China do not cause global “meltdown”. Crises in China are a) dealt with quickly in a paranoid way; and b) are at worst a momentary slowdown in China’s rise; not a reversal. Google “salt”, “art share” or “jasmine”.
To paraphrase a senior official last year, “It makes no difference whether a train hits you at 80km/h or 60km/h. It will kill you either way.” A meltdown in China just means reverting to a sensible rate of economic acceleration. Property prices will revert from “booming” to a steady, upward trend. GDP will revert from 13% to just 7% (as the recent NPC & CPPCC meetings concluded). Westerners won’t even see the train slowing down.
China’s rise only looks like a bubble to anyone raised in the West. To us Chinese, the last 2000 years worth of economic data show we’re simply getting back on our feet, where we’ve stood proud for 19 of the last 20 centuries. So set the EMA on your MACD calculations to 10,000 days or more. Run RSI or “very slow” stoch over the last two millennia and you’ll see that in the long-term, China is still heavily undervalued, reverting to the high value we’ve maintained for 2000 years. The vast majority of Western and Chinese forecasts agree with this.
Isn’t is funny how Wall Street didn’t have two-year foresight on the crises unfolding in their own buildings? And now some short-sighted nerds predict a collapse in China in two years’ time? Thank you for teaching the Chinese the concept of “irony”. We understand now. That train will plough through the West before you’ve ’spotted’ it.
James Kennedy
The Communist Party promotes markets that grow in its favour. Since China’s banks have been in a perpetual state of crisis and bailout (default and write-off) for the last 20 years (despite national economic growth), any increased effect from this “off-balance sheet lending” will remain hidden in the data.
Crises in China do not cause global “meltdown”. Crises in China are a) dealt with quickly in a paranoid way; and b) are at worst a momentary slowdown in China’s rise; not a reversal. Google “salt”, “art share” or “jasmine”.
To paraphrase a senior official last year, “It makes no difference whether a train hits you at 80km/h or 60km/h. It will kill you either way.” A meltdown in China just means reverting to a sensible rate of economic acceleration. Property prices will revert from “booming” to a steady, upward trend. GDP will revert from 13% to just 7% (as the recent NPC & CPPCC meetings concluded). Westerners won’t even see the train slowing down.
China’s rise only looks like a bubble to anyone raised in the West. To us Chinese, the last 2000 years worth of economic data show we’re simply getting back on our feet, where we’ve stood proud for 19 of the last 20 centuries. So set the EMA on your MACD calculations to 10,000 days or more. Run RSI or “very slow” stoch over the last two millennia and you’ll see that in the long-term, China is still heavily undervalued, reverting to the high value we’ve maintained for 2000 years. The vast majority of Western and Chinese forecasts agree with this.
Isn’t is funny how Wall Street didn’t have two-year foresight on the crises unfolding in their own buildings? And now some short-sighted nerds predict a collapse in China in two years’ time? Thank you for teaching the Chinese the concept of “irony”. We understand now. That train will plough through the West before you’ve ’spotted’ it.
thomas
Hope so and good luck!
Surely, this time history will repeat again! The US with this ‘type of economic model’ (undervalued currency & huge foreign reserve,etc.) in 1920s, then came the Great Depression in 1929 and the whole world suffered!! The second recent notable experience is the ‘Japanese miracle’ in 1980s with the same characteristics (export-oriented, undervalued currency and huge huge foreign currency reserve, asset bubble ,etc.)and then its coming down with ‘the following lost decades’! The big difference is the US and Japan having a high-tech industries (relative to that time)not a low-tech, labor intensive one(literally global sweat-workshop) like China’s today!!
But any way, hope for the best as usual!
JP
Yah, I live here in Beijing and have for 5 years, I can tell you it’s not 60% its 100%. Their mercantilist economy didn’t come to an end during the crisis in 08 because the gov’nt pumped about 3 trillion dollars in easy loans and direct stimulus that has exacerbated an already bloated real estate bubble as well as a stock market bubble, as well as rampant inflation. Let me give you an idea of whats going on here. The average person here in China makes about 800-2000rmb a month. Housing prices are about 2 million rmb for a small 800 square foot apartment. To rent that same apartment is about 4000rmb a month. Normal average everyday working people cannot even rent an apartment. Pork which is the meat of choice here, is about 15-20 rmb per pound. Now this is the capital city, the other cities aren’t as bad, but the proportions of cost of living compared to average wage is just as bad. Anyone living here can see that this is not sustainable. The country is getting by on gov’nt spending alone which is not sustainable. This talk of creating a domestic demand driven economy is not possible when 80% of the people are making scraps and still can’t even afford to rent apartments. Mind you education and retirement is paid out of pocket here. A “cheap” kindergarten (I’m a kindergarten ESL teacher) costs about 1500 rmb a month. How can you afford that if your making 2000 rmb a month and you have to save for retirement because your country has no social security system. The municiple governments here have a combined debt equal to 70% of the whole countries gdp, different estimates have put anywhere from 1/3 to half of that debt being non preforming loans. Couple that with the raising interest rates to combat inflation which is officially at 6%, and the central bank raising the reserve requirements of all the banks here AND the increasing number of retirees that are now going to be withdrawing money from their accounts and no longer depositing money. Of course there’s going to be a crisis. The local gov’nts unable to repay their loans. The real estate developers that are not going to be able to repay their loans because they can’t sell houses. (There are whole sections of the city that empty apartments complexes, and apartment complex here are meant to house 10’s of 1000’s and this is the capital!) Lets not even get into the private sector here, because there majority of the population is so poor and the competition is so steep, no one is making profits here. The profit margins are razor thin if your making a profit at all, the companies are relying on gov’nt subsidies, loans, and investment to sustain themselves. Not income from selling a product or service. I know back home they make China out to be this big scary monster that’s going to eat America up, but if you live here and see what’s going on its a completely different story. Most experts here think that you talk to seem to think that the crisis coming to China will end in a Soviet style collapse. I could go but I think you guys get the point.