Kyle Bass, the U. S. investor known for betting against subprime mortgages, is among famous money managers who expect turmoil in a Chinese banking industry struggling with bad loans. It’s in the least-known corners of the financial system that their predictions could start to come true.
Dotted across the country from Harbin in the north to the tropical island of Hainan in the south, China’s 134 city commercial banks have multiplied their risks by piling into opaque investment products just as bad loans are rising. Warning signs are flashing at lenders such as China Resources Bank of Zhuhai Co., which posted a 90 percent slump in profit in 2015 after almost tripling loan-loss provisions.
‘It’s a smoldering bonfire,’ said Keith Pogson, a senior partner for Asia-Pacific financial services at Ernst & Young LLP. ‘If the wind changes and inflames it rapidly it could burst into flames quite easily.’
City commercial banks are the legacy of a 1990s clean-up of thousands of struggling credit unions, and many of them are vulnerable in part because their fortunes are closely tied to areas suffering the most from China’s economic slowdown. While analysts say it’s unlikely that the collapse of a small lender would spark a financial panic, the repercussions could be substantial – from a loss of confidence to disruptions in the interbank funding market.
In June 2013, the failure by China Everbright Bank Co. to repay short-term loans sent interbank borrowing costs soaring to a record. Such shocks can disproportionately hurt smaller lenders who are more dependent on interbank borrowing.
This post was published at David Stockmans Contra Corner on June 14, 2016.
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