State ownership means there’s little chance of systemic banking crisis in China
Financial risks in China need to be continuously managed in a proper way, but the risks are still manageable. The BIS might have exaggerated the situation.
In 2016, the BIS said excessive credit growth in China was a sign of an increasing risk of a banking crisis in the next three years. Although the BIS has repeatedly stressed the risks of a banking crisis in the years since then, China's banking system is so far safe and sound, without large bankruptcies seen in the country.
The report by the BIS found China's credit-to-GDP gap has surpassed a level that might lead to a systemic crisis, leaving the country's banking system vulnerable due to a high debt-servicing ratio. China does need to keep its debt level under proper control. However, if the country's high savings ratio is taken into account, the overall debt servicing ability is acceptable.
China's contribution to global economic growth stayed at about 30 percent in 2017, and the Chinese economy is exuberant. A big share of credit flows to the country's production sector, where it generates new assets. Debt expansion is a normal situation in a fast-growing economy.
What's more, China's business environment differs from that of Western countries. The risk of a systemic financial crisis is closely monitored by the State. Banks that are majority-owned by the State account for a big portion of the Chinese banking system's assets and deposits. Although those banks have embraced market-oriented operations, we believe the government has the ability to maintain financial stability.
In 2017, deleveraging efforts made by the government mostly focused on the financial sector, with measures such as standardizing interbank business and wealth management business.
In a report on Thursday, ratings agency Moody's said that asset growth has already slowed from the regulatory tightening of shadow banking and interbank activities.
Some Western observers don't really understand China but draw their conclusions based on Western experience. However, the Chinese economy has its own characteristics, and the current debt level in China is still controllable.