Chinese Risk Limited for Most Banks Outside Asia, Says Fitch

Most banks outside Asia have a small direct exposure to China despite the recent growth so a slowdown in China would only have a limited direct risk for them, says Fitch Ratings. However, they may be vulnerable to any secondary effects from slower Chinese growth.

Banks' exposure to China has been rising. International banks' direct exposures - loans and securities claims - on China almost doubled over the past three years, to US$698bn at end-2013 in 24 countries reporting to the Bank of International Settlements (BIS) on an ultimate risk basis.

Fitch notes other claims, such as guarantees and derivatives, are not captured in this data.

China risk concentration is low for the largest countries outside of Asia. UK banks have the largest direct exposure, according to the most recent BIS data, at US$200bn, but this is only 1.6% of banking system assets.

Nevertheless, this is concentrated in two banks, HSBC and Standard Chartered, which have onshore activities.

The two banks operate the largest foreign subsidiaries in China despite having only very small market shares. The BIS data is a starting point for Fitch's analysis.

Fitch has already estimated HSBC's total China risk at US$148bn at end-2013, or about 1x Fitch Core Capital (FCC), and Standard Chartered's at US$82bn or about 2x FCC.

Most are cross-border and trade-related activities, with a significant share to state-sponsored entities, but the two banks' onshore activities are significant and growing steadily.

US banks had US$83bn of direct claims on China, a very small 0.6% for the sector. US investment banks may also have other potential claims, including derivative contracts. Still these would be small relative to assets.

Citigroup has a Chinese subsidiary and is the most exposed of the US banks, but its total China exposure was US$32bn at end-2013 according to FFIEC 009a regulatory data (around 20% of its FCC).

Other countries with larger exposures to China also have manageable risk - with Japan at 0.6% of assets, France 0.4%, Germany 0.4% and Australia 1.2%.

Australia's exposure has grown the most rapidly as trade increased between the two countries and Australian banks have pushed their expansion in Asia.

Lending is related largely to short-term trade finance. Overall exposure is relatively modest compared with the five largest banks' FCC at 26%.

Overall, much of the growth in China risk is influenced by Asian countries even though these are only partly captured in the BIS series.

The data includes Taiwan and Singapore, but not Macao and Hong Kong. Although Hong Kong is partly captured as the local subsidiaries of HSBC and Standard Chartered, it reports under the UK holding companies.

China concentration in the region is most pronounced in Hong Kong and Fitch believes that Hong Kong authorities' have one of the widest definitions of corporate China exposure.

Based on a combination of their data series for non-bank Mainland China exposure and claims on banks, Hong Kong's China-related exposure calculates as US$798bn or 34% of the system assets at end-2013, rising from 19% at end-2010.

China risk has also grown in other countries in the region - reaching 20% of banking assets in Macao - and Fitch estimates 12% in Singapore and 7% in Taiwan.

The downside risk is increasing in Hong Kong and in the region. But we believe there is a low probability of a "hard landing" for China's economy and that a China-related expansion strategy offers growth opportunities in the long term.


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