China’s credit boom appears to be on its way out, and it may take its banks along with it. Chinese bank stocks have fallen substantially over fears that they are overexposed to bad loans and that tightening credit, falling real estate prices and a slowing of the economy will push them into the danger zone.
Bloomberg reported that the MSCI China Financials Index fell 24% in September; that’s lower than benchmark bank gauges for Europe, the U.S., Japan and emerging markets. And despite the fact that Industrial & Commercial Bank of China and Bank of China Ltd. reported record first-half profits and analysts increased 2012 forecasts, valuations fell last week for the first time to below those during the financial crisis.
Hedge fund manager Jim Chanos said in a Sept. 20 interview on Bloomberg Television that China’s economy might not be growing at all, saying, “A lot of people are assuming that half of all new loans in China are going to go bad. In fact, the Chinese government even said that last year relating to the local governments. If we assume that China will grow total credit this year between 30% to 40% of GDP, and half of that debt will go bad, that is 15% to 20%. Say the recoveries on that are 50%. That means that China, on an after-writeoff basis, may not be growing at all. It may be having to simply write off some of this stuff in the future so its 9% growth may be zero.” Chanos is shorting Chinese banks, property developers, and “anything related to property there.”
Edward Chancellor, who helps oversee about $106 billion as a strategist at Grantham Mayo Van Otterloo & Co. in Boston, also had cautionary words about China’s banks. “China’s economy is very distorted, and the banks, as ever, are at the epicenter of the distortions,” he said, adding, “If China runs into problems with the banking system, which I think it will, I cannot see a situation in which foreign investors are the main priority of Beijing.”