Lastly, banks with direct Chinese exposure may be vulnerable. Hong Kong banks would have to be near the top of the list. China accounts for close to 30% of Hong Kong bank loans. Moreover, bank assets are now an astonishing 7x the size of Hong Kong GDP.
It’s a scary number that equates to the size of Iceland’s prior to its 2008 crisis. The circumstances are very different but Hong Kong banks are susceptible due to their exposure to China as well as a gigantic local property bubble (which the Chinese have helped inflate).
Incidentally, commentary on the fall-out from a China downturn to date has failed to make mention of the potential impact on global property markets. In Hong Kong, Australia, Canada and, to a lesser extent, Singapore, Chinese have been key investors over the past three years.
It’s difficult to get any hard numbers on the extent of Chinese investment in the residential property (and other property segments) of these countries. But it’s substantial and any reduced Chinese investment would be keenly felt by residential developers and banks in these countries.
AC Speed Read
– There’s a lot of talk of China tightening and deleveraging, when neither has occurred.
– China’s President, Xi Jinping, hasn’t done nearly enough to deflate the country’s credit bubble.
– If he doesn’t soon act to deflate credit, Xi risks a much larger economic blow-up in the not-too-distant future.
– To a large degree, China’s stock market has priced in a steeper economic downturn. But key China proxies, including Hong Kong and Australia, haven’t and remain most at risk from the coming China downturn.
This post was originally published at Asia Confidential: