China: risk of a financial crisis in the future is on the rise - Danske Bank

According to analysts from Danske Bank, due to high growth in corporate credit, misallocation, understated losses, a rise in shadow banking and increasing leverage, the risk of a financial crisis in China in the future is on the rise. 

Key Quotes: 

“The concern over rising financial risks is widespread and growing. However, few expect a financial crisis within the next one to two years as the government still has buffers and many levers to use to kick the can down the road. However, most institutions see the risk of a financial crisis within five years as quite high and rising, as excesses keep rising with current efforts insufficient to rein in credit.”

“This is much in line with our own view. We now see a 50% chance that China will run into a financial crisis of a serious magnitude on a four- to five-year horizon. However, we do not see a crisis coming in the next few years. We do, however, expect to see continued bouts of fluctuating fears in the markets and periods of liquidity squeezes from the People’s Bank of China (PBoC) to mitigate rising leverage. We expect the Chinese government will need to recapitalise banks eventually and clean out bad loans into ‘bad’ banks – as seen in the Chinese banking crisis in 1998.”

“A bailout will not come, however, until a crisis is the only alternative and the road there is likely to be bumpy. Risk premia in the stock markets are likely to stay elevated for a long time. We aim to publish a presentation that gives more insight into the growing financial risks in China. Below is an overview of the rising problems and complexity in the Chinese financial system.”

“Chinese debt is increasing rapidly; hence, the problem is getting bigger, not smaller. Corporate debt is at the centre of the problem whereas household debt and government debt is quite low. Overall, credit growth has risen twice as rapidly as GDP over the past three years due to the corporate credit expansion.”