SUMMARY OF CHINA'S DEBT BUBBLE
1. In November 2016, Fitch Ratings warned that China’s bad loans in the banking system might be 10 times the official estimates of 1.8% of total assets.
2. The predictions of a Chinese banking crisis have been proven wrong multiple times and the concerns should lie somewhere else in the system rather than in a systemic blow-up.
A TIME BOMB THAT DOESNT GOES OFF
1. The government still owns the major banks which are funded by stable retail deposits and as long as the current system set-up remains, an increase in bad assets per se is probably not enough to trigger a financial crisis.
2. On the contrary, in an open and mature market and with a NPL problem, the creditors would lose faith in the debtors and cut funding, leading to a systemic collapse in the form of a debt-currency crisis.
3. However, in this scenario the majority of the creditors in China are the households, who are ultimately backed by the government. Reinforced with the fact that China is a single party state with its closed capital account helps lock up domestic liquidity and keep the banking system whole.
CRISIS TRIGGERS
1. The Bank for International Settlements (BIS) argues that when a country’s private-sector debt-service ratio rose to above 25% of GDP a year, a financial crisis would follow later.
2. Some market estimates have put China’s non-public sector debt-service ratio at over 30% in 2015.
3. crisis triggers such as a deregulated financial system, a heavy foreign debt burden and an open capital account which pushed countries into a financial crisis are not present in China.
MANAGING BAD ASSETS
1. banks do not fail due to bad assets. They fail when they cannot fund themselves either through deposits (as in a classic bank-run case) or the wholesale market.
2. The trigger for a banking crisis lies on the liability side of the bank balance sheet; a rise in bad assets per se does not necessarily bring down a financial system.
