Ben Chu: Could China’s credit hangover prove to be a headache for HSBC?


When a financial hurricane smashed into the Western world in late 2008, China somehow seemed to emerge unscathed. The Middle Kingdom has its banks to thank for that.

Acting under direction from the Beijing leadership, these lenders turned their credit taps on full blast to offset the shock of tanking global demand. Domestic investment and infrastructure spending surged, filling the hole left by collapsing exports and ensuring that GDP carried on growing at 8 per cent a year.

The by-product of this rescue was, by some measures, the biggest expansion of lending in a single nation that the world has ever seen. Between January 2009 and January 2012 China’s banks issued 25 trn yuan (£2.39 trn) in new loans, equal to around  50 per cent of the country’s 2011 GDP.

But something suspicious has also happened in the sector. Despite the tidal wave of new credit, the ratio of non-performing loans reported by the banks fell sharply. The ratio dropped from  6.2 per cent of total loans in 2007 to just 1 per cent in 2011. And that’s where it has stuck pretty much ever since.

It’s impossible to find an independent analyst who believes these bad loan figures. Financial history teaches that an economy can’t digest such a massive increase in credit over such a short period efficiently. A significant portion of that credit must, logically, have been wasted and the underlying loans must now be toxic. Plenty of ghost cities and empty roads in China seem to back this intuition up.

Analysts also point to an explosion of the shadow financial system in recent years, which has pushed the total level of private debt in the economy to above  200 per cent of GDP. They fear that the risks from the rapid growth in sales of opaque “trust products” could also end up blowing holes in the balance sheets of Chinese banks in the coming years.

Chinese banks are still reporting strong profits and reasonable capital ratios. But scepticism over the health of these institutions is reflected in the fact that their shares are trading below their nominal  book value.

Tellingly, not even the banks’ managements are behaving as if they believe their official rosy figures. Research by the investment bank Grisons Peak shows Chinese banks (after prodding from the regulator) collectively raised $22bn (£13bn) in new equity last year to reinforce their balance sheets. And the boards of China’s bank have approved plans to raise an additional $57bn in total by the end of 2016. If the true bad loan ratio across China’s banks turns out to be as big as some analysts fear, that already chunky recapitalisation sum could grow significantly. Another analyst, ChinaScope Financial, has put the total equity hole as high as $100bn.

When a host of state-owned Chinese banks raised equity in the 2000s by partially floating in Hong Kong, they attracted a good deal of foreign interest. In 2005 Bank of America bought a $3bn stake in China Construction Bank. The Royal Bank of Scotland took a $1.6bn chunk of the Bank of China. In 2006 Goldman Sachs bought into the Industrial and Commercial Bank of China for $2.6bn.

Most of these foreign banks have sold out in recent years, booking good profits in the process. According to Grisons Peak the average compound return on these investments was north of 20 per cent.

Yet some Western banks have hung on.  HSBC, for instance, still has the 19 per cent stake in China’s Bank of Communications (Bocom) it acquired in 2004. Bocom is eyeing a $6.6bn cash call by the end of 2016. Last month that figure was approved by its board. This could end up being costly to the UK-listed bank. One market rumour has it that HSBC could ultimately need to inject up to $2bn into its Chinese partner – although the bank declined to comment on that suggestion.

HSBC is carrying its Bocom stake on its balance sheet above the traded value of the equity. In 2012 it performed a stress test on this stake and concluded the valuation was sound. But things have moved on since then. The Chinese banking sector is looking shakier as GDP growth has moderated. Last year’s liberalisation of lending rates by the authorities is expected to damage banks’ profit margins. It’s possible we will get an update on the Bocom situation when HSBC releases its 2013 results next Monday.

HSBC has always maintained that its stake in Bocom is long-term and strategic, describing the partnership as a bridgehead into the lucrative China banking market.It brought into a previous Bocom cash call in 2012 to maintain the relative size of its stake. But timing is everything, even for strategic acquisitions. If China’s great credit binge does end as messily as many analysts think, HSBC could live to regret not following its peers and selling out when it had the chance to book a large profit.

Start your day with The Independent, sign up for daily news emails
Life and Style
Steve Shaw shows Kate how to get wet behind the ears and how to align her neck
healthSteven Shaw - the 'Buddha of Breaststroke' - applies Alexander Technique to the watery sport
footballShirt then goes on sale on Gumtree
Terry Sue-Patt as Benny in the BBC children’s soap ‘Grange Hill’
voicesGrace Dent on Grange Hill and Terry Sue-Patt
Arts and Entertainment
The sight of a bucking bronco in the shape of a pink penis was too much for Hollywood actor and gay rights supporter Martin Sheen, prompting him to boycott a scene in the TV series Grace and Frankie
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine