S&P says credit risk in the Chinese economy may continue to worsen

BEIJING - Standard & Poor's has revised its view of the economic risk trend for China's banking sector to negative from stable, saying that 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.

“We believe there is a one-in-three chance that the banking sector's credit exposures to nonfinancial and non-public sectors in China could surpass 150% of the country's GDP in the next two years,” S&P says.

“This is despite deceleration in China's credit growth, mainly due to dampened investment sentiment, rising risk aversion in shadow banking, and a debt consolidation plan for China's local governments.

“We also believe that the downturn risk for China's property market remains high despite signs of stabilisation in top-tier cities. Residential property prices have started to fall nationwide since mid-2014 after rising for several years.

“Despite a recovery in property prices and sales in major cities in the first half of 2015, we believe China's property market remains exposed to a correction, given the supply glut in many small cities after years of construction boom.

“The industry risk trend for banking industry is stable. We expect banking regulators to stay vigilant and responsive to China's economic slowdown and unintended consequences of the unfolding financial disintermediation.

“We view China's ongoing interest-rate liberalisation, deceleration in shadow banking, and rapidly deepening domestic debt capital market as positive developments for the sector. However, we believe any material improvement in the sector's information risks and market distortions is unlikely in the next two years, given still-significant shadow banking and prevalent Government ownership in banks. www.standardandpoors.com (ATI).