China Banking Crisis Dark Clouds Forming

China Banking Crisis Dark Clouds Forming.

Headlines already this week contradict each other with UK performing better than expectations after the Brexit vote but with warnings that the UK’s biggest export i.e. banking and financial services looking set to be the biggest loser without a trade agreement with the EU and another suggesting Europe will lose if access to London’s financial hub is restricted.

Two other bigger drivers are more likely to affect global economies, that of the two largest economies in the World:  the USA and China.

Warnings have been issued by global credit specialists that China’s ratio of borrowing over gross domestic product (GDP) stands at over 30.  The ratio that is usually accepted to be of concern is 10+, this means that China is 3 times the suggested warning level for debt to ‘turnover’.  This is huge and represents a significant risk to the central bank if too many firms default of their borrowing.

In the US, we all know the phrase: “If the USA sneezes, the World catches a cold”.  At present, inflation in the US is climbing rapidly, currently at 2.6%pa, which is over what most government trend growth rates are at 2.5%pa.  What usually happens is that central banks then increase interest rates to take the heat out of the economy.  Interest rates are currently around 0.25%pa.  The Federal Reserve team meet tomorrow to review interest rates and are unlikely to increase rates tomorrow, but ultimately they will have to do so.

Higher interest rates means higher loan costs for business, lower profits meaning lower share prices and individual investors saving more and spending less.  This puts a real risk of putting an economy, already shaky, into recession.

Comment

With pressure mounting in the US for interest rate hikes, China’s banking system overstretched with high risks of default, the Italian banking system in crisis, the fall-out from UK Brexit, not forgetting Greece, Portugal, Spain and France are nowhere near being ‘healthy’ economically, we suggest the ­‘dark clouds forming’ in our headline could in fact be the ‘perfect storm’.

No doubt markets will rise if the US freezes interest rates again and markets will fall if they do increase rates.