Goldman: China might face credit losses of up to 18.6 trillion yuan ($3 trillion), because the speed of its credit expansion has exceeded that seen prior to other credit crises in history

Credit losses may hit $3 trillion, bank says

Updated: 2013-08-09 07:25

By Wang Xiaotian ( China Daily)

Goldman Sachs report warns of shadow banking risk elements

China might face credit losses of up to 18.6 trillion yuan ($3 trillion), because the speed of itscredit expansion has exceeded that seen prior to other credit crises in history, Goldman SachsGroup Inc has warned. In a report dated Aug 5, it said the rapid pace of China’s credit expansion, increasingly sourcedfrom the inherently more risky and less transparent “shadow banking” sector, has become atop concern for global markets. “Our Asian economists and strategists recently published a comprehensive look at this concernand its implications for economic growth and asset performance in China, calculating that anextreme upper-bound for total China credit losses could amount to 18.6 trillion yuan,” the reportsaid. But actual credit losses are likely to be significantly lower than these worst-case figures,emerge gradually and be partially absorbed by bank earnings or other avenues, it added.“There is ample room on the sovereign balance sheet to provide support, if required,” thereport said.

It said commodity demand and prices, emerging market economic growth and assetperformance would be most at risk from any fallout from China, while some United Statesassets, especially US domestic-facing equities, rates and the dollar could potentially rise.

Helen Zhu, Goldman Sachs’ chief China equity strategist, said parts of the corporate sector arethe greatest source of credit risk, especially sectors with excess capacity, along with localgovernment financing, while the unintended consequences of intentional policy tightening couldcause things to go bad.

The impact on economic growth and asset performance will depend highly on governmentactions, she said, because the more proactive the nation is in tackling reforms, the morenegative are the implications for near-term growth and asset returns – but the more positiveover the medium term.

Figures from Fitch Ratings show that the credit-to-GDP ratio of China was close to 200 percentat the end of 2012, up by 70 percentage points in four years.

Charlene Chu, a senior director in the financial institutions group at Fitch, said that by the endof this year, banking sector assets will have increased about $14 trillion from the end of 2008,amounting to the entire US commercial banking sector.

Total social financing of the world’s second-largest economy in the first half exceeded 10 trillionyuan, up more than 30 percent year-on-year, according to central bank figures.

Louis Kuijs, chief China economist at the Royal Bank of Scotland Group, said a systemicfinancial crisis – one that overwhelms the economy and the financial system – is less likely inChina, although overall lending as a percentage of GDP is rather high for a country of China’slevel of development.

A Standard & Poor’s Ratings Services report said a systemic threat to China posed by rapidexpansion of shadow-banking activities may be several years away, if it emerges at all.

“We believe major Chinese banks’ capitalization, earnings and liquidity profiles provide acomfortable buffer to absorb any possible hit from shadow banking and credit risks in theChinese economy,” said S&P’s credit analyst Ryan Tsang.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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