Chinese Banking Crisis Looming

A Chinese banking crisis may be on the horizon.

A Chinese banking crisis on the horizon.

The last six years have seen Chinese investment in the UK increase by 500% with no apparent sign of slowing down in the wake of Brexit.

Although Theresa May announced tighter restrictions on foreign investment in the UK after giving the go ahead of the Chinese invested Hinkley power plant; it seems that a Chinese consortium—who are being advised by Goldman Sachs— are now bidding £11 billion for a majority stake in the national grid that serves gas to 11 million homes.

With all these investment opportunities available to foreign investors as a result of a weaker pound, one must wonder how much longer the UK will be able to continue to sell off their infrastructure to the highest bidder.

The Global banking watchdog has warned that a Chinese banking crisis is on the horizon and could occur within the next three years. The Bank for International Settlements (BIS) considers a credit-to-GDP gap of 10% as a potential risk; however, China has reached 30.1% three times higher than the danger level. As the second largest economy in the world with a debt of £19.35 trillion— 249% of their GDP— it looks as if China’s efforts to spur on growth in the economy may come back to bite them. This is the same amount as both the US and Japan’s commercial banking sector combined. Any financial crisis China suffers will be felt worldwide.

With £1 trillion worth of loans at risk of default, many analysts assume that the banking sector, which is mainly owned or controlled by the Chinese government, will receive a bailout when the financial crisis finally hits. Although China managed to survive the banking crisis of 1990, the circumstances back then were different. The result of a financial crisis, combined with China’s attempt to spur on their economy would only have an adverse effect as it would slowly drain the country’s vitality.

The UK is set to suffer the greatest setback compared to the rest of the world when China’s bubble bursts. Although China was once viewed as a great investment opportunity, it is currently being regarded as a risky one, with the UK topping the list of 25 countries who report their lending data and £169  billion in outstanding loans in China. The effect of a financial crisis in China will surely have huge repercussions on a fragile UK economy that has barely recovered in the aftermath of Brexit and is relying heavily on a future free trade deal with China.

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