No Meltdown As China Banks 'Healthy', IMF Says

[beijingwalker]

Forbes:No Meltdown As China Banks 'Healthy', IMF Says

Kenneth Rapoza
11/16/2011

In yet another blow to the China hard landing shorts out there, the International Monetary Fund said in a 126 page report released this week that the country’s financial sector is sound.

Stress tests of the largest 17 commercial banks showed that most of the banks seem resilient to isolated shocks, including a sharp reduction in real estate and other asset values, shifts in the yield curve, and changes in the exchange rate. If several of these risks were to occur at the same time, however, the banking system could be severely impacted, however. A full assessment of the extent of these risks in China is hindered by data gaps, the IMF said.

“China’s banks and financial sector are healthy, but there are vulnerabilities that should be addressed by the authorities,” Jonathan Fiechter, deputy director of the IMF’s Monetary and Capital Markets Department was quoted as saying in an official press release.

“While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and the formation of bubbles, especially in real estate. The cost of such distortions will only rise over time, so the sooner these distortions are addressed the better,” he said.

Many economists, included famed NYU Professor Nouriel Roubini, have been pointing to growing problems in the Chinese economy. The government spent nearly $700 billion in a stimulus package in 2008 and 2009, most of it going to infrastructure and real estate. Roubini, and others, say that there is a strong possibility that many of those loans will never be paid off. Moreover, as the government cracks down on exorbitant real estate prices in tier 1 cities like Shanghai, developers are forced to take less for the property that expected, causing some small to mid-sized developers financial hardship that could lead to bankruptcies and job losses at a time when China’s population is aging and the government needs all the workers — and tax revenue — it can get its hands on to keep retirees away from the poor house.

Chinese often invest in real estate because of low yields on fixed income at the bank. Other than investing in a volatile stock market, housing is the only asset to hold and that can lead to pricing bubbles.

Talk of bubbles popping in economies the size of China makes investors nervous. A hard landing of the Chinese economy would be a major drag on global growth. In fact, over the last three and a half years, Asia — led by China — have been the only reason why global GDP has grown by more than 2%.

China financials’ direct exposure to the real estate market is moderate, but indirect exposure is much higher, the IMF said in the report. Real estate related loans account for some 20% of the Chinese banking system’s total loans, relatively low compared with United States. Loan terms in China depend heavily on collateral use. In the five largest banks, 30–45% of loans are backed by collateral, the majority of which is real estate. A large real estate price correction would reduce collateral values, and hence loan recovery value should borrowers default. In addition, credit to industries that are “vertically integrated” with the real estate sector — mainly civil construction, cement, and steel — are also exposed to these risks. Given the importance of the real estate sector for economic growth, an economic slowdown as a result of a real estate price correction could impact China’s economy and definitely its banks.

However, in the short-term, the impact appears manageable especially if the current growth momentum continues. According to the IMF, there does not appear to be significant over-valuation of residential real estate prices in China as a whole, though there are signs of overvaluation in some market segments. Also, the moderate direct exposure and low leverage ratio of China home buyers would limit the impact of a real estate price correction on banks’ asset quality.

Over the medium- to long-term, the risk posed by the real estate sector depends on whether the fundamentals
behind the real estate price increases are addressed by policy measures promoting job growth in urban areas, and higher incomes.

Other than real estate impacts on China banks, the other near-term domestic risks include the impact of the recent sharp credit expansion on banks’ asset quality; the rise of off-balance sheet exposures and of lending outside of the formal banking sector and the increase in imbalances due to the current economic growth pattern.

 

[oct605032048]

No matter how they may suck up us, we won't pay a penny for the Euro Bailout.

 

[Obambam]

Feeding a snake is a dangerous thing to do. You give it enough food to help it regain enough energy, it will turn back and bite you.

 

[twocents]

Generally speaking I am not a big fan of feel-good pieces. Only the psychologically insecure has a need for them. I am curious about how many of you agree or disagree with me on that. Shall we take a poll?

 

[T90TankGuy]

did not know the Chinese banks were even unhealthy to begin with . i always thought with such huge reserves they would not have a problem .

 

[S10]

did not know the Chinese banks were even unhealthy to begin with . i always thought with such huge reserves they would not have a problem .

Chinese banks have shitty lending practices, resulting in alot of high risk loans. The real estate sector is especially prone. Foreign reserve can't be utilized to address this problem.

 

[canadian icehole]

Generally speaking I am not a big fan of feel-good pieces. Only the psychologically insecure has a need for them. I am curious about how many of you agree or disagree with me on that.

Does Forbes usually go on a China-bashing spree? I don't follow Forbes that closely so I don't know of their political slant (if there is one). This article does address the 'doom & gloom' folks warning of China's impending real estate implosion so I wouldn't consider this a feel-good article. I agree it does feel weird of hearing a favourable article after subjected to numerous negative articles. It's like having your enemies declaring peace to you once in a while.

Shall we take a poll?

Go for it.

 

[Jade]

Chinese banks have shitty lending practices, resulting in alot of high risk loans. The real estate sector is especially prone. Foreign reserve can't be utilized to address this problem.

Yes, Chinese banks have shitty lending practices, but they have proved to be blessing in disguises. China would not have developed so fast if not for its banking system and its lending practises. Anyway, with billions in assets and government backing, Chinese banking system is surely secure and going strong.

 

[ao333]

Of course Chinese banks are healthy. They're state owned. Any ill practice is immediatly remedied by state aid, at tax payer's expense. If it was up for debate, you guys are talking about bailouts every year.

 

[beijingwalker]

at least way better than US banks.

 

[Chinese Century]

china's banking system is very different from the western model.
chinese banks are state owned, their main job is to lend money to businesses to help them grow.
even if those loans are never paid back, it doesnt matter to the chinese government.
the primary aim of the chinese banking system is to make sure the primary, secondary and tertiary gets the money.

if the loans turn bad, the chinese government comes in and injects capital for all the bad loans like it did in 2003/2004 and strips the bad loans out of the balance sheet off the banks. then the banking system can continue to do its thing by lending and not hurting the ability of businesses to get loans if the banks collapse like in the west. china injects capital way before there is a run on the banks, whereas in the west its injected only when banks fail and it affects the economy.
the chinese way makes sure the chinese businesses continually get loans no matter what happens to the banking system as the government will take care of the banks.

its a very different model from the western model banking system.

the banking system is critical to any economy as if the banking system fails and businesses cant get loans, the entire economy collapses.
chinese way is that the banking system will not be allowed to fail.
it will be reset whenever the need arises thus not affecting the economy.

this happened in 2003/2004.

 

[no_name]

It's dangerous if banks have the influence to wrangle a state's policy to suit its profiteering.

Not perfect but better if the state aligns the bank's policy to its own.

 

[SuperDoper]

A significant share of the Chinese banks are owned by Americans. You know what I am saying?
And the Chinese owns, you know, Fanny May and Fredie Mac.

 

[Chinese Century]

A significant share of the Chinese banks are owned by Americans. You know what I am saying?
And the Chinese owns, you know, Fanny May and Fredie Mac.

chinese banks are 70% state owned.
30% is powned by the public.

of that 30%, its all kinds of institutional investors and sovreign wealth funds and retail investors that own the shares.
ur comment is flawed, americans do own shares, but everyone own shares. it mostly owned by chinese.

freddie and fannie are agencies, they are not what u consider classical banks.

---------- Post added at 02:49 AM ---------- Previous post was at 02:47 AM ----------

It's dangerous if banks have the influence to wrangle a state's policy to suit its profiteering.

Not perfect but better if the state aligns the bank's policy to its own.

the chinese banks do what the chinese government tells them to do.
when the government said lend money to wenzhou to overcome the credit crunch, the banks immediately lent money.

 

[SuperDoper]

chinese banks are 70% state owned.
30% is powned by the public.

of that 30%, its all kinds of institutional investors and sovreign wealth funds and retail investors that own the shares.
ur comment is flawed, americans do own shares, but everyone own shares. it mostly owned by chinese.

freddie and fannie are agencies, they are not what u consider classical banks.

---------- Post added at 02:49 AM ---------- Previous post was at 02:47 AM ----------



the chinese banks do what the chinese government tells them to do.
when the government said lend money to wenzhou to overcome the credit crunch, the banks immediately lent money.

How about a significant share of liability? Happy now? The deal between Americans and the Chinese is probably in the trillions for the Americans, for free. You know what I am saying? That deal is going "public."