There is an interesting article on Yahoo news about the China - Hong Kong banking linkages LINK1 . Let's not forget both countries have clear signs of a property bubble and if the property bubble starts to unwind in China then this will have a big impact on both property prices and the profits of Hong Kong banks that have large exposure of some $430 billion to mainland China. There are more and more sign of financial stress in China following the recent default by Shanghai Chaori Solar Energy and Haixan Steel LINK2 There are signs that panic may even be spreading to the Chinese citizens who might rightly worry about the impact of a fall in the property sector on the viability of some Chinese banks LINK3. I think that the Forbes report in LINK2 is underestimating the risks in China and for a change the Merill Lynch team are right when they state:
"We doubt that the financial system in China will experience a liquidity crunch immediately because of this default but we think the chain reaction will probably start.”
The reason I think they are right is that China has had a very long run of economic expansion and, as such, problems have been hidden by growth. As growth slows then the problems that have been buildling up will start to come to the fore. The massive credit explosion of the banking system from 2008 to 2013 with bank credit rising from $10 trillion to $24 trillion kept the Chinese economy going and booming so to speak. However, much of that credit went into poor projects with poor returns and also led to an explosion of property prices and the property sector. Many that borrowed will struggle to repay and that means serious problems for economic growth and the banking sector in both China and Hong Kong. Sure there will be a policy response but prepare for a hard landing in both China and Hong Kong !
"We doubt that the financial system in China will experience a liquidity crunch immediately because of this default but we think the chain reaction will probably start.”
The reason I think they are right is that China has had a very long run of economic expansion and, as such, problems have been hidden by growth. As growth slows then the problems that have been buildling up will start to come to the fore. The massive credit explosion of the banking system from 2008 to 2013 with bank credit rising from $10 trillion to $24 trillion kept the Chinese economy going and booming so to speak. However, much of that credit went into poor projects with poor returns and also led to an explosion of property prices and the property sector. Many that borrowed will struggle to repay and that means serious problems for economic growth and the banking sector in both China and Hong Kong. Sure there will be a policy response but prepare for a hard landing in both China and Hong Kong !
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