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

Outlook

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.

PROMOTED VIDEO
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Manager - SAS - Data Warehouse - Banking

£350 - £365 per day: Orgtel: Manager, SAS, Data Warehouse, Banking, Bristol - ...

SQL DBA/Developer

£500 per day: Harrington Starr: SQL DBA/Developer
 SQL, C#, VBA, Linux, SQL Se...

.NET Developer

£650 per day: Harrington Starr: C#.NET Developer ASP.Net, C#.net, WCF, WPF, .N...

Planning Manager (Training, Learning and Development) - London

£35000 - £38000 per annum + benefits: Ashdown Group: A highly successful, glob...

Day In a Page

Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

Lauded therapist still in limbo as battle to stay in Britain drags on

Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

Lewis Fry Richardson's weather forecasts changed the world...

But could his predictions of war do the same?
Kate Bush asks fans not to take photos at her London gigs: 'I want to have contact with the audience, not iPhones'

'I want to have contact with the audience, not iPhones'

Kate Bush asks fans not to take photos at her London gigs
Under-35s have rated gardening in their top five favourite leisure activities, but why?

Young at hort

Under-35s have rated gardening in their top five favourite leisure activities. But why are so many people are swapping sweaty clubs for leafy shrubs?
Tim Vine, winner of the Funniest Joke of the Fringe award: 'making a quip as funny as possible is an art'

Beyond a joke

Tim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

Sadly though, the Lawrence of Arabia star is not around to lend his own critique
Wicken Fen in Cambridgeshire: The joy of camping in a wetland nature reserve and sleeping under the stars

A wild night out

Wicken Fen in Cambridgeshire offers a rare chance to camp in a wetland nature reserve
Comic Sans for Cancer exhibition: It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans

Comic Sans for Cancer exhibition

It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans
Besiktas vs Arsenal: Five things we learnt from the Champions League first-leg tie

Besiktas vs Arsenal

Five things we learnt from the Champions League first-leg tie
Rory McIlroy a smash hit on the US talk show circuit

Rory McIlroy a smash hit on the US talk show circuit

As the Northern Irishman prepares for the Barclays, he finds time to appear on TV in the States, where he’s now such a global superstar that he needs no introduction
Boy racer Max Verstappen stays relaxed over step up to Formula One

Boy racer Max Verstappen stays relaxed over step up to F1

The 16-year-old will become the sport’s youngest-ever driver when he makes his debut for Toro Rosso next season
Fear brings the enemies of Isis together at last

Fear brings the enemies of Isis together at last

But belated attempts to unite will be to no avail if the Sunni caliphate remains strong in Syria, says Patrick Cockburn
Charlie Gilmour: 'I wondered if I would end up killing myself in jail'

Charlie Gilmour: 'I wondered if I'd end up killing myself in jail'

Following last week's report on prison suicides, the former inmate asks how much progress we have made in the 50 years since the abolition of capital punishment