Tuesday, December 12, 2017

China: A 19th Party Congress postscript

A decent interval has passed since China's 19th Party Congress (see Beware the expiry of the 19th Party Congress put option), and it's time to check in again on China to see how things are progressing. For the China bears, the overhang in debt looms large.

The worries are especially acute in light of International Monetary Fund's publication of the results of its financial stability assessment of China. In connection with that review, the IMF issued the following warning about three sources of vulnerability:
  • Excessive debt: In particular, concerns were raised over the rapid buildup of debt to keep non-viable zombie companies alive.
  • Growth of shadow banking: The growth of the shadow banking system makes it more difficult to monitor and control the risks in the financial system.
  • Moral hazard: The IMF also raised concerns over "moral hazard and excessive risk taking" because of the belief that the government will bail out troubled state-owned enterprises (SOEs) and local government financing vehicles (LGFV).
The concerns raised by the IMF echoes the writings of Winston Yung at McKinsey, who penned an article called "This is what keeps Chief Risk Officers in Chinese Banks awake at night".
  • Economic downturn leads to the emergence of credit risk
  • Risk management cannot keep up with constantly changing business models: 
  • Asset liability mismatch
  • Significant risk from off balance sheet activities
The full post can be found at our new site here.

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