22 December 2015

Reuters: UK bank stress tests do not clear fog over China risk

British banks survived the Bank of England’s 2015 stress tests largely unscathed, but the assessment published earlier this month also underscored the vulnerability of the UK banking system to China.

Key to the tests was a check of the resilience of UK banks to an emerging markets crisis scenario in which Chinese growth falls to 1.7 percent, effectively a screeching halt from nearly 7.5 percent in 2014 and 6.9 percent at last measure.

While BoE Governor Mark Carney concluded “the UK banking system would have the capacity to continue to lend to the real economy even under such a severe scenario,” some of the numbers are striking, especially in the context of Britain’s push for closer economic ties with the Asian superpower.

The concern is that slump in China would lead to a rise in corporate defaults. Chinese private sector debt has reached nearly 200 percent of annual economic output, up from around 120 percent in early 2008.

The BIS warned in September of early signs of banking stress in places with strong credit growth. The credit-to-GDP gap – a proxy for how fast credit is growing – was above 25 percent in China, higher than the 10 percent level which is often followed by serious banking strains within three years, the BIS said.

Another concern is that Chinese authorities may be underplaying the extent of the debt risks. Fathom Consulting estimates that around 15 percent of loans made by China’s banks were non-performing by the end of last year, far higher than the official estimate of 1.6 percent.

Full article on Reuters (with charts)

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