The creditworthiness of China’s financial institutions is likely to get worse, ratings agency Standard & Poor’s warns, adding that the country’s property market is exposed to a “correction”.
On Monday, the agency revised its view of the economic risk trend for China’s banking sector to negative from stable, highlighting that changing economic conditions could have an effect on Chinese banks.
“Credit risks in the Chinese economy may continue to worsen, as indicated by rapidly rising credit losses and still-significant credit growth amid China’s economic slowdown,” a new report said.
“We believe there is a one-in-three chance that the banking sector’s credit exposures to non-financial and non-public sectors in China could surpass 150 percent of the country’s GDP (gross domestic product) in the next two years.”
The risk associated China’s banking sector is now on a par with countries like Bermuda, Brazil, Colombia, and India, the agency said.
It also noted that the downturn risk for China’s property market remains “high” despite signs of stabilization in top-tier cities and stressed that it believed China’s property market remains exposed to a “correction.”
This downbeat analysis from Standard & Poor’s comes hot on the heels of a severe depreciation for Chinese stock markets which have helped to roil global sentiment. Growth concerns for the world’s second-largest economy even played a part in the decision from the U.S. Federal Reserve last week to hold off on hiking interest rates for the first time in seven years.
China’s economy has been on a tear for the last decade with a debt-fueled boom helping it to post double-digit GDP figures. However, a focus on a more consumer-driven economy and a tightening in some rules and regulations has led many economists to believe that it might be in for a “hard landing.”
New York-based CBB International – which published its third-quarter Beige Book on China Monday – tried to play down the idea that the economy is collapsing. It stated that current market perceptions of China were “thoroughly divorced” from the reality.
Stuart Oakley, managing director of global emerging markets at Nomura, has a similar view and told CNBC Monday that China is more stable than other emerging markets.
“China is a country that, yes it’s debt levels have gone up palpably, but it’s all domestic debt and it can all be funded internally. You’ve got $20 trillion worth of a deposit base there. You have an autocratic political regime that has monetary and fiscal levers to deal with any problems that come its way,” he said.
“It’s my bet that this economy and its asset markets will outperform everything in the emerging market universe over the next few years.”