Despite Chinese megabanks’ rising global systemic risk scores, their primarily domestic footprint and limited foreign use of the yuan are less likely to trigger a global financial crisis such as Lehman in the event of bank failure, experts say.
Among the 30 globally systemically important banks, or G-SIBs, China Construction Bank Corp was the only institution to move into a high bucket in the latest annual assessment by the Financial Stability Board based on 2019 data. The Industrial and Commercial Bank of China Limited’s total G-SIB score, the world’s largest bank by assets, rose for the fifth consecutive year, with Agricultural Bank of China Ltd.’s score rising for the third straight year, while Bank of China FSB and S&P Global Markets According to Intelligence, Limited’s score was largely flat after growing for four years.
The valuation comes as major Chinese state-backed companies default as their bonds, the nation’s commercial banks’ average non-conforming lending ratio rose to a high level, and Beijing reinforced the financial risks of shadow banks, microlenders and Announced the imposition of third-party payment platform which was believed to be one of the reasons for the sudden stoppage of the massive IPO of Ant Group Company Limited.
“Clearly, the relationship between the global financial system and Chinese banks is still relatively limited,” Hang Qian, a partner at Oliver Women, told S&P Global Market Intelligence. “It’s a lot more meaningful to see how assets on their balance sheets stretch, given the size [jurisdictions]”
Much of the benefit of G-SIB scores of Chinese banks was due to their large size, one of the five elements of the formula. Scores of other elements, such as complexity, cross-jurisdictional activity, and non-substitution that indicate coordination resolution difficulties and diffuse effects from any failure, are still comparable to many other G-SIBs of similar rank from the US I was less , Europe and Japan.
Most domestic development
Chinese lenders are expanding their balance sheets as they heed the government’s call to power the country’s economy, with signs of slowing in the face of the COVID-19 epidemic. By the end of 2019, the total assets of the Chinese G-SIB rose between 7.1% and 10% from a year earlier, according to the banks annual report.
The score shows that “the size of Chinese banks continues to grow rapidly [China’s] Larger economic size relative to the world, “said Gary Ng, an economist at Asia Sectoral Research in Natics. China’s economy grew 6.0% in 2019, a 2.4% growth according to the global economy, according to the World Bank.
As China became one of the world’s largest manufacturers, consumers and trading partners, as well as a major funding source for many less-developed countries under the country’s so-called belt-and-road diplomatic initiative, the Chinese megabank overseas Are expanding even earlier in the last decade than before.
Nevertheless, Beijing’s directive to prioritize the country’s own growth has greatly increased his wealth. At the end of 2019, China Construction Bank, Bank of China and Agricultural Bank of China stated that less than 10% of their total assets are located outside of mainland China, while ICBC stated that about 13% of its total assets are in its annual. The property was in accordance. Report.
“If you look at the balance sheets of these Chinese banks, even though they are large, and that is why they have systematically significant bank status, their global connections are limited,” Qian said. “If you look at American banks that are systematically significant, their assets are being cut off in many jurisdictions … and are still much more organized than Chinese banks.”
Limited offshore use of the yuan
The use of the yuan outside of mainland China is still limited, partly due to the country’s capital control, which will cushion the spillover effect on the global financial system to some extent should the Chinese G-SIB fail.
As of the end of 2019, according to International Monetary Fund data, the yuan held 1.8% of global foreign exchange reserve assets. Meanwhile, the US dollar holds 57%, Euro 19%, Japanese Yen 5.5% and British Pound 4.3%.
“When the Chinese currency becomes one of the major settlement currencies in the world, roughly equivalent to the US dollar … this is the point when the global economy needs to pay more attention to that,” Qian said.
In 2016, the yuan joined the US Dollar, Euro, Yen and Pound in the IMF’s special withdrawal rights basket, which determines the currencies that countries can acquire as part of IMF debt. While the move was seen as a milestone for China’s efforts to internationalize the yuan, it remains a matter of debate as to whether the yuan would allow the IMF’s reserve currency norm to be “freely usable” Is fully merged, in which the fund defines currency as “to be widely used”. Pay for international transactions and basically trade in the major exchange markets. “
Multiple Home Fonds
Experts also believe Beijing has a tough stance on Beijing’s financial system, from market liquidity to exchange rates, which will reduce the bank’s chances of major failure in the first place.
“China is now increasingly building leverage and financial risks, taking more into account of excessive stimulus; however, we feel that China is taking a policy stance to facilitate privatization, monetary toward normalization policies Will take a slow turn of conditions. ” Sector recovery, ”said Bruce Pang, head of macros and strategy research at China Renaissance Securities (Hong Kong).
The country’s long-awaited plan to identify 30 domestic systematic banks or D-SIBs was also discontinued earlier this year, although TOfficials have not announced additional capital and leverage requirements for additional buckets.
“The measures will certainly help Chinese banks reduce the potential for material and systemic risks,” said Yongmei Cai, a partner at Simmons & Simmons Beijing.
There are risks
Experts said that despite the low likelihood of contagion, China’s potential risk of gradually opening up its market to foreign investors in recent years, though limited to the global financial system.
“We feel that the potential domestic risks facing Chinese banks, such as pressures, poor debt and the economic slowdown in asset quality and implemented reforms, may cause some risks and further disruption to the broader financial system and global economic activity, “Pang of China Renaissance said. . But he said, “We see no near-term disruption and risks from Chinese banks on global stability.”
Ng of Natix said that foreign ownership of Chinese bonds and equities has increased in recent years as Beijing gives them greater access, which is another potential risk to world markets.
“Until sovereign yields are affected, bond yields and spillover to the world through [yuan] They have to be manageable and the market feels that the risks are inherent in specific firms, which means that fear should be limited, ”he said.
These risks, if mismanaged, could still send shocks around the world, but perhaps through a widespread consumption slowdown or supply-chain disruption, experts say.
“Hypothetically, let’s say there is a financial crisis in China, which I have to say is very unlikely … The entire world’s supply chain will shut down and everything that the world depends on can go to the end,” Said Qian of Oliver Vian. “There may be some systemic issues not through the financial system, but through the real economy.”
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