Tags: Fitch | China | bank | debt

Fitch: China's 'Credit-Driven Growth Model Is Falling Apart'

Monday, 17 Jun 2013 11:43 AM

By Michael Kling

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China may be facing the worst ever credit bubble, warns Fitch Ratings.

The heart of its problem is its extremely opaque shadow banking system of trusts, wealth-management funds and offshore vehicles that allows companies to avoid regulations and hide large amounts debt.

"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," Charlene Chu, Fitch's senior director in Beijing, told The Daily Telegraph.

Editor’s Note:
Put the World’s Top Financial Minds to Work for You


"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are and what the quality of assets is, and this undermines signaling."

China has been resilient to economic slowdowns in the past, but this time the size of its credit bubble is so large, it could have real difficulty rebounding. The Chinese government might have the will and the power to rescue the banking system, experts say. The question is how a collapse would impact economic growth and political stability.

China's credit has gone from $9 trillion at the peak the financial crisis to $23 billion, according to The Telegraph, and its ratio of credit to gross domestic product has spiked to 200 percent.

"This is beyond anything we have ever seen before in a large economy. We don't know how this will play out. The next six months will be crucial," Chu told The Telegraph.

"There is no way they can grow out of their asset problems as they did in the past. We think this will be very different from the banking crisis in the late 1990s."

China may be quickly approaching "Minsky Moment," when a debt pyramid collapses, Wei Yao of Societe Generale told The Telegraph.

"The debt snowball is getting bigger and bigger, without contributing to real activity."

Reports of substantial defaults are already emerging, The Telegraph reported, citing Bank Everbright's default on an interbank loan. Plus, volatile swings in short-term borrowing rates indicate the liquidity is evaporating.

Other analysts told Bloomberg a banking collapse in China is not imminent. Despite its recent credit boom, its credit-to-GDP ratio is still lower than many other countries, they noted.

"Given that China’s credit is mostly funded by its internally generated deposits, I don’t think a real financial crisis, which is normally manifested in a liquidity shortage, will happen anytime soon," Liao Qiang, a Beijing-based director at Standard & Poor's, told Bloomberg.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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