High chance of financial crisis in China, says Credit Agricole senior economist
Dariusz Kowalczyk, senior economist/strategist at Credit Agricole Corporate and Investment Bank, feels that an imminent financial crisis in China is probable, with stress signs in WMPs and trust loans particularly evident. February 26, 2014 | Dariusz KowalczykFinancial risks in China are rising due to a high level of debt as a share of GDP, which we estimate at 226% at the end of last year, and a yet-to-be fully mature market for credit intermediation, which leads to moral hazard and insufficient regulatory oversight. The two areas that have recently showed signs of stress and therefore deserve particular attention are wealth management products and trust loans. Trusts are a legitimate and necessary funding channel but carry risks that are magnified by their widespread use and insufficient education of market participants. They are regulated by the China Banking Regulatory Commission (CBRC) and are a useful platform for financing riskier businesses. The problem is that they fund themselves largely via individuals’ savings raised through wealth management products (WMPs), where moral hazard is high given lack of client understanding of the risks related to their investments. We expect policymakers to phase out ad-hoc efforts to prevent defaults, tighten regulations and educate markets on the risks of investing via trusts and entrusted loans. The process may cause financial, social and economic volatility. This is because the public is not accustomed to defaults even of risky investments sold with the intermediation of banks and because of the size of WMP and trust business. According to latest data, individuals have invested $1.6 trillion in WMP products by September 2013, while trust loan portfolio has increased to $1.8 trillion in December, with a large number of trust loans due to mature this year. Repayment problems have recently been increasingly highlighted by the media, and the trend is likely to continue. Borrowers are likely to be facing rising challenges with repayment due to numerous factors. They include GDP growth slowdown, deteriorating money market liquidity and higher financing costs, declining ability of local governments to provide support, government campaign to delevera... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: China, Operational Risk, Risk and RegulationChina,Oprisk,Risk and Regulation, China,Operational Risk,Risk and Regulation, Keywords:Darius Kowalczyk, Credit Agricole, CBRC, WMP, Market Risk, Liquidity Risk Darius Kowalczyk, Credit Agricole, CBRC, WMP, Market Risk, Liquidity Risk
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