China Faces 60% Risk of Bank Crisis by 2013, Fitch Gauge Shows
By Bloomberg News - Mar 7, 2011 8:36 PM ET

China faces a 60 percent risk of a banking crisis by mid-2013 in the aftermath of record lending and surging property prices, according to a Fitch Ratings gauge.

The assessment is from a macro-prudential monitor used by the ratings company, Richard Fox, a London-based senior director, said in a phone interview on March 4.

Chinese Premier Wen Jiabao pledged more efforts to cool the property market on March 5, telling lawmakers that “exorbitant” increases in housing prices in some cities are a top public concern. His officials are aiming to limit the risks posed by a 48 percent increase in money supply over two years because of the stimulus program that propelled the nation through the global financial crisis.

Fitch sees a risk of “holes in bank balance sheets” should a property bubble burst, Fox said.

China’s risk of a systemic crisis is based on the nation’s MPI3 classification, the highest of three risk categories, in a Fitch monitor begun in 2005. The indicator signaled crises in Iceland and Ireland and has been tested back to the 1980s, Fox said.

Sixty percent of emerging-market countries downgraded to MPI3 face banking crises within three years, he said. China entered that classification in June. The indicator’s failures have included not sounding an alarm about the banking system in Spain, he added.

Lending Fallout

Banking systems in emerging markets are vulnerable to systemic stress when credit growth exceeds 15 percent annually over two years with real property prices rising more than 5 percent, according to Fitch. Credit growth in China averaged 18.6 percent annually over 2008 and 2009 as house prices jumped, according to the ratings company.

The fallout from China’s lending spree may be bad loans totaling $400 billion, according to Hong Kong-based advisory firm Asianomics Ltd.

China’s government is concerned at the risks posed by lending to local-government financing vehicles for stimulus projects. In his March 5 speech to lawmakers, Wen pledged a “comprehensive audit” of local-government debt, while the Ministry of Finance said separately that “local governments face debt risks that can’t be overlooked.”