China banking risks three times higher than US

By:
Sid Verma
Published on:

China’s banking risks have tripled in one year amid a decline in market capitalization for the sector and a rise in debt issuance, as fears over the shadow-banking system grow, according to the latest projections from a systemic risk index, Euromoney can reveal.

ICBC_R-envelope
Workers install a new sign for a branch of the Industrial and Commercial Bank of China (ICBC) in downtown Shanghai

The amount the Chinese government would need to inject into its banking system in the event of a financial crisis – defined as a 40% semi-annualized fall in global stock markets – has tripled in a year to €470 billion, according to a new study, underscoring rising fears over the rapid pace of leverage in the country.

According to a systemic risk (SRisk) index calculated by the Volatility Institute at NYU Stern School of Business, and in partnership with the Centre for Risk Management at Lausanne (CRML), China has the highest level of SRisk at €460 billion, compared with €153 billion in February 2013, followed by Japan (€387 billion) and the US (€296 billion).

While analysts are largely sanguine about headline capital adequacy ratios of Chinese banks, Michael Rockinger of CRML, professor at HEC Lausanne, the University of Lausanne, tells Euromoney the study suggests systemic risks in the core banking market have grown amid asset-quality deterioration, as the economy rebalances and adjusts to a lower growth rate, and policymakers reduce credit growth and opacity in the shadow-banking system.

"Chinese banks lend to companies involved in shadow banking or may invest in trusts which lend to companies, taking the place of banks," he says. "Because this layer of financial intermediation appears risky to investors, the stock market valuation of Chinese banks suffers relative to their assets.

"My worry is that SRisk has increased by so much recently. Other countries such as the USA and Japan have brought their SRisk down steadily over the past few years, as well as the euro-area. In addition, SRisk of China is three times larger than the USA."

Global jitters

Chinese banks’ headline debt-to-equity ratios have deteriorated, in part, by the rise in debt issuance and a fall in bank stock prices amid global jitters over China’s rising debt burden.

"It appears Chinese banks borrowed more in the fixed-income market to indirectly sponsor the shadow-banking system," adds Rockinger. "As investors disliked this, they turned away from banks, leading to the fall of bank market cap."

Further reading
 
China: special focus

According to the study, with the exception of Bank of China – still seen as the riskiest bank in the country – all banks have seen a notable increase in perceived systemic risk during the past six months, with the Industrial and Commercial Bank of China posting an increase in SRisk of €7.5 billion, an 18.2% deterioration, followed by the Agricultural Bank of China, which saw its SRisk increase by €5.3 billion, or 10.3%.

The influential Volatility Institute is run by NYU professor Leonard Stern and Nobel laureate Robert Engle, focusing on US and Asian banks, while the European index is run by Rockinger, gauging large European banks’ systemic risk by measuring size, leverage and exposure to global equity-market shocks.

The European index reveals France and Italy have reduced leverage by 11% and 19% year-to-date respectively, while core Europe, which, in general, is home to less-indebted institutions, has largely remained stabled.

Peripheral Europe has continued to improve, in tandem with improving bond yields, with Spain’s SRisk dropping by more than half from €23.8 billion to just €10.2 billion.

SRisk (bn Euro)

Date

Greece

Portugal

Spain

Russia

Ukraine

Turkey

07/2012

26.19

10.45

117.33

1.91

0.04

0.02

12/2013

12.19

3.57

23.60

0.69

0.00

0.92

01/2014

10.79

3.41

23.80

1.61

0.00

1.82

02/2014

10.08

1.87

19.03

2.77

0.00

1.51

03/2014

10.06

1.64

16.79

7.04

0.01

0.88

04/2014

12.37

1.75

16.19

7.09

0.03

0.18

05/2014

8.74

2.66

10.19

1.26

0.02

0.18

 

SRisk (bn Euro)

Country

SRISK

(bn Euro)

SRISK

(% GDP)

Rank

China

459.9

7.8

6

Japan

386.9

9.0

4

United States

295.7

2.5

8

France

229.2

13.6

2

United Kingdom

174.1

11.4

3

Germany

110.4

8.0

5

Italy

62.0

5.9

7

Switzerland

48.3

0.18

1

 

SRisk for various Chinese Banks (bn Euro)

Date

Bank of

China

Agricultural Bank of China

China Construction Bank

Industrial & Commercial Bank

Bank of Communi-cations

China CITIC Bank

Shanghai Pudong

Industrial Bank

Dec 2013

74.1

52.1

50.7

41.7

30.8

19.2

16.7

15.8

May 2014

65.6

57.4

57.0

49.2

33.2

20.1

17.4

17.3

Change

-11.6%

10.3%

12.4%

18.2%

7.8%

4.9%

4.6%

9.2%