China could be on the brink of a credit crisis

Published:  19 Jun at 9 AM Credit agency Fitch Ratings has warned that a growing credit bubble in China could result in over-capacity and drive the country to Japanese-style deflation. Charlene Chu, a senior director with Fitch based in Beijing, said the shadow banking system has little or no transparency. Talking to The Daily Telegraph, she admitted that it is not clear who the lenders or the borrowers are.

She added that because half of all new lending was through offshore vehicles, wealth-management funds and trusts it was easy to off-load bad assets. She added that there were already examples of defaults in trust products. Recently a spike in Shibor borrowing rates caused Bank Everbright to default on an interbank loan.

Fitch estimates that $2 trillion worth of wealth products are actually second balance sheets for financial institutions that allow them to avoid the regulators and circumvent loan curbs.

According to Chu the central bank has $3 trillion in reserves taken from the banks to be used as a buffer in the event that there is a financial crisis. However, she added that even a pot of this size may not be enough to deal with the sheer scale of China’s lending boom.

She went on to say that since the Lehman crash five years ago, China has managed to effectively replicate the US commercial banking system. During this period lending has grown from $9 trillion to a staggering $23 trillion.