BIS sees risk of 1998-style Asian crisis as Chinese dollar debt soars; The world’s banking watchdog warns that foreign loans to companies and banks in China has tripled over the last five years and may be large enough to set off financial tremors in the West

BIS sees risk of 1998-style Asian crisis as Chinese dollar debt soars

The world’s banking watchdog warns that foreign loans to companies and banks in China has tripled over the last five years and may be large enough to set off financial tremors in the West

By Ambrose Evans-Pritchard

9:30PM GMT 27 Oct 2013

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Foreign loans to companies and banks in China have tripled over the last five years to almost $900bn and may now be large enough to set off financial tremors in the West, and above all Britain, the world’s banking watchdog has warned. “Dollar and foreign currency loans have been growing very rapidly,” said the Bank for International Settlements in a new report. “They have more than tripled in four years, rising from $270 billion to a conservatively estimated $880 billion in March 2013. Foreign currency credit may give rise to substantial financial stability risks associated with dollar funding,” it said. China’s reserve body SAFE said 81pc of foreign debt under its supervision is in dollars, 6pc in euros, and 6pc in yen.The BIS said loose money policies by Western central banks since the Lehman crisis had cut the cost of foreign funding in East Asia, tempting firms to borrow heavily in dollars. The risk is that this process could go into reverse as the US Federal Reserve shuts the spigot, triggering off a dollar liquidity shortage across the region with even bigger knock-on effects than during the East Asian crisis in 1997-1998.

British-based banks hold almost a quarter of all cross-border bank exposure to China, and the figure has risen since 2008.

By contrast, German, Dutch, French and other European banks have slashed their share from 32pc to 14pc, chiefly because they are retrenching to beef up capital ratios at home. Some of the British banks are likely to be branches of Mideast lenders or agents of foreign wealth funds, recycling money through London.

The BIS said the Asian dollar funding crisis after the Lehman crash should be a warning shot, though the sums in the region are already much larger. Korea was deeply alarmed by its reliance on European bank debt in 2008-2009 and has capped dependence, but China and Hong Kong have not followed suit.

Talk of Fed `tapering’ in May this year offered a foretaste of trouble to come. It caused a ‘sudden stop’ in capital flows and a surge in dollar borrowing costs across much of Asia. The squall blew over when the Fed began to pull back again, but the BIS said the issue has not gone away.

“It is worth recalling that the deflationary shock from the currency depreciations during the Asian financial crisis in 1997–98 interrupted the tightening phase of the Federal Reserve, with implications for asset markets,” said the report, entitled ‘Transmitting Global Liquidity to East Asia’.

East Asia is a much bigger economic animal today than it was fifteen years ago. The BIS said “financial instability” in the region could complicate the West’s exit from quantitative easing. “There is a risk of blow-back effects to major economies.”

The report said the loan-to-deposit ratio for foreign currencies in China has doubled from a well-behaved level of around 100pc in 2005 to nearer 200pc today. It is “not clear” where the extra foreign currency has been coming from, but seems to involve foreign exchange swaps and forms of credit off the BIS radar screen. At the same time bond issuance by Chinese firms has increase tenfold to almost $80bn in just eight years.

The Chinese state holds the world’s largest foreign reserves at $3.7 trillion and the country has capital controls, so there is little danger that China itself could suffer the sort of currency crisis that hit Korea, Indonesia, or Thailand in the 1990s. That does not mean foreign banks will necessarily get their money back if they lent too much to over-indebted Chinese companies.

The Chinese state has already signalled that it will not rescue private firms with too much debt, letting the solar company Suntech Power default on $541m of notes. Premier Li Keqiang is pledging market discipline as part of his liberalization and reform drive.

For China itself the risk is that a dollar funding crisis becomes the trigger for an internal financial crisis. Chinese credit has soared from 125pc to 200pc of GDP in just five years, prompting a string of warnings from Fitch Ratings over the stability of the financial system. A dollar squeeze could come at a very unwelcome moment.

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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