Banking crisis brewing in China but Temasek confident

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By: 永久浪客/Forever Vagabond

BBC reported today that the Bank for International Settlements (BIS), the global banking watchdog, is concerned about the mounting risks of a Chinese banking crisis. BIS monitors the international flow of money and credit.

Stress in the banking sector of a country can be measured by the key gauge credit-to-GDP gap (i.e,  borrowing in relation to the size of the economy). The BIS considers a credit-to-GDP gap of 10 to be a sign of potential danger.

Currently, China’s credit-to-GDP gap hit 30.1 in the first quarter of 2016, up from 25.4 a year ago. This is now more than three times above the danger level, said BIS in its latest quarterly review.

When the borrowings in a country start to diverge and increase rapidly in relation to the GDP of the economy, a banking crisis could be on the way, BIS warned.

IMF estimates that loans worth $1.3 trillion are at risk of default in China.

Temasek is biggest foreign investor in Chinese banks

Meanwhile, it has been reported that Temasek Holdings is very confident of the Chinese financial industry.

It is now the biggest foreign investor in Chinese banks. Last year, it raised its stake in Industrial & Commercial Bank of China (ICBC) to 10 percent of the company’s Hong Kong-listed shares after a stock market rout drove the world’s largest bank to record-low valuations.

“Temasek is confident in the long-term prospect of the Chinese economy,” a Temasek spokesman said. “We actively seek opportunities to broaden and rebalance our exposure to the Chinese economy.”

Temasek has been boosting its holdings of ICBC shares over the past four years. The firm bought 3.55 billion shares at HK$5.05 apiece from Goldman Sachs Group Inc. in April 2012 and then disclosed the purchase of more the following month. In May 2013, Temasek bought 280 million more from Goldman Sachs at HK$5.5 a share, and in October 2014, raised the holding at an average HK$4.935 each.

Bloomberg commented, “Temasek’s expression of confidence comes at a time when concerns are mounting that banks’ sour credit will surge and Chinese President Xi Jinping will struggle to revive the economy as a stock slump erased $5 trillion of market value.”

China’s stock market plummeted last June in a rout that saw indexes plunge by as much as a third. Shortly after, US$5 trillion was wiped off global stock markets over two weeks last August after China’s surprise devaluation of the yuan.

At the beginning of this year, another cut in the value of the Chinese currency triggered a plunge in Chinese shares, followed by a tidal wave of losses in global bourses.

But Temasek has been steadily increasing its exposure to China, which made up 27 per cent of its portfolio as of last year.