Concerns about the health of the Chinese housing market may force China to join the can kickers of the world on what may be a long road to recovery. If this happens will China shift from being a saviour to a foe of the global economy and where does this scenario leave Chinese banks?
The major Chinese banks (Bank of China, Industrial and Commercial Bank of China (ICBC), China Construction Bank and Agricultural Bank of China), will probably enter the spotlight in the coming months on concerns about slack credit expansion for housing and infrastructure projects. The major Chinese banks trade on P/B of 1.2-1.7 for 2011 with exceptional Return-on-Equity expected at 17-22% (table 1). So, why worry? Well, the main stakeholders in the Chinese banking sector are also among the Titans of the global financial sector.
The Chinese housing market may be in bubble mode in the major Chinese metropolises, especially Shanghai and Beijing. ‘Expensive’ housing in Beijing and Shanghai has increased as much as 200% in the last year, forcing Beijing to halt sales of most exclusive apartments to dampen price hikes. This comes despite Chinese home buyers tending to put up at least 30% equity, or even paying cash when buying a home.
Transparency and consensus are key
As yet, there is no clear consensus regarding the existence of a bubble in China. However, the potential implications are enormous with Beijing already repeatedly hiking the reserve requirements for domestic banks to cool credit expansion. If risk aversion spikes, on the back of a lack of transparency and the necessity for Chinese banks to create a more realistic capital allocation system (based on market conditions rather than the interests of Beijing) the market could experience a financial tsunami.
Beijing - ‘The Big Influencer’
Beijing’s influence on Chinese banks is clear. Its credit to the Local Government Financing Vehicles (LGFV) amounts to RMB 10tr (USD 1.5tr), according to the Chinese Government. Furthermore, the Chinese Government has put up a guarantee of RMB 2-3tr (USD 308-463bn) worth of credit which basically means it is already beyond rescue but a further RMB 5tr (USD 770bn) might also be in jeopardy, according to Bank of America – Merrill Lynch. The scale of this is stifling.
A classic Western style real estate bubble? Forget it!
The main reason that analysts are divided concerning China is that we are not talking about a “good old” western style solvency crises, where loans outgrow actual property values. The problem lies in obtaining a unified overview of credit exposure, given the size of the country and the price discrepancy among regions.
The Chinese household debt to disposable income ratio is only 45% in 2010, compared to 60-100% in most European countries and 130% at the peak of the housing market in the U.S. in 2007. Instead, it might all come down to oversupply, thereby disrupting market equilibrium. Nevertheless, the loss of wealth could be enormous, damaging consumers' desire to spend and in the long run the recovery of the global economy.
The major Chinese banks (Bank of China, Industrial and Commercial Bank of China (ICBC), China Construction Bank and Agricultural Bank of China), will probably enter the spotlight in the coming months on concerns about slack credit expansion for housing and infrastructure projects. The major Chinese banks trade on P/B of 1.2-1.7 for 2011 with exceptional Return-on-Equity expected at 17-22% (table 1). So, why worry? Well, the main stakeholders in the Chinese banking sector are also among the Titans of the global financial sector.
The Chinese housing market may be in bubble mode in the major Chinese metropolises, especially Shanghai and Beijing. ‘Expensive’ housing in Beijing and Shanghai has increased as much as 200% in the last year, forcing Beijing to halt sales of most exclusive apartments to dampen price hikes. This comes despite Chinese home buyers tending to put up at least 30% equity, or even paying cash when buying a home.
Transparency and consensus are key
As yet, there is no clear consensus regarding the existence of a bubble in China. However, the potential implications are enormous with Beijing already repeatedly hiking the reserve requirements for domestic banks to cool credit expansion. If risk aversion spikes, on the back of a lack of transparency and the necessity for Chinese banks to create a more realistic capital allocation system (based on market conditions rather than the interests of Beijing) the market could experience a financial tsunami.
Beijing - ‘The Big Influencer’
Beijing’s influence on Chinese banks is clear. Its credit to the Local Government Financing Vehicles (LGFV) amounts to RMB 10tr (USD 1.5tr), according to the Chinese Government. Furthermore, the Chinese Government has put up a guarantee of RMB 2-3tr (USD 308-463bn) worth of credit which basically means it is already beyond rescue but a further RMB 5tr (USD 770bn) might also be in jeopardy, according to Bank of America – Merrill Lynch. The scale of this is stifling.
A classic Western style real estate bubble? Forget it!
The main reason that analysts are divided concerning China is that we are not talking about a “good old” western style solvency crises, where loans outgrow actual property values. The problem lies in obtaining a unified overview of credit exposure, given the size of the country and the price discrepancy among regions.
The Chinese household debt to disposable income ratio is only 45% in 2010, compared to 60-100% in most European countries and 130% at the peak of the housing market in the U.S. in 2007. Instead, it might all come down to oversupply, thereby disrupting market equilibrium. Nevertheless, the loss of wealth could be enormous, damaging consumers' desire to spend and in the long run the recovery of the global economy.
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