Chinese Banking System at Risk of Crisis, While Lending Big, According to Report

March 13, 2018 Updated: March 13, 2018    

LONDON—China’s banking system is at risk of a crisis, the Bank for International Settlements (BIS) said in a report released on Sunday.

The BIS, an umbrella body for global central banks, found that China’s credit-to-GDP gap, reached a level that indicated high stress. Meanwhile, its debt service ratio—a country’s debt payments to its income—was also flagged. A high ratio means the country’s finances are more vulnerable.

The organization also warned that Hong Kong and Canada were at risk, both with a high credit-to-GDP gap and debt service ratio.

High Levels of Lending

At the same time, Chinese banks have significantly stepped up their lending activities in recent years to rank now as the sixth-largest international creditor group. Chinese banks had cross-border financial assets worth about $2 trillion as of the third quarter of 2017.

As Chinese banks lend abroad largely in U.S. dollars, in absolute terms this makes them the third-largest provider of U.S. dollars to the international banking system, the BIS added.

“Their global footprint encompasses not just emerging market economies, but also advanced economies and offshore centers worldwide,” the BIS said.

The BIS paper warned on borrowers’ reliance on a “common lender,” noting this had exacerbated past Asian financial crises.

This refers to a situation in which several countries borrow from just a few big international banks, raising the risk that losses in one country encourage the banks to withdraw from other borrower countries as well.

“Contagious spillovers can thereby spread the turmoil around the globe,” the report said.

For example, at the time of the Asian financial crisis of 1997-98, Japanese banks dominated lending to emerging Asia—namely Indonesia, South Korea, Malaysia, the Philippines, and Thailand—holding 42 percent of international consolidated claims on the five countries.

From Reuters. Epoch Times staff member Annie Wu contributed to this report.