International lending to China surges by $92bn as banks shrug off fears of a debt bubble - Daryl Liew's interview

City A.M. - 19.07.2017

Lending by international banks to China surged in the first quarter of the year, new data from an influential central bankers’ body shows, reflecting increasing confidence in the country despite fears of a debt bubble in the world’s second-largest economy.


Cross-border bank assets lent to emerging economies grew by eight per cent year-on-year in the three months to March, with China accounting for more than half of that growth, according to the Bank for International Settlements (BIS).


The increase in emerging markets helped drive global cross-border banking assets up by $427bn (£328bn) in the first three months of 2017 to reach $27.7 trillion in total, a two per cent year-on-year increase.


Assets lent to emerging markets accounted for $151bn of the increase, the largest step-up since the start of 2014. Some $92bn of that was lent to China.


Cross-border lending to China totalled $850bn at the end of March 2017, although this remained 23 per cent lower than its September 2014 peak of $1.1 trillion.


The figures illustrate improved confidence in the prospects for China and other less developed economies in the last year. At the same point last year lending to emerging markets had fallen by an annual rate of nine per cent as the prospect of a so-called hard landing in the Chinese economy fuelled fears of an emerging market crash.


Since then GDP growth in the Chinese economy has accelerated from an annual rate of 6.7 per cent in the first three quarters of 2016 to reach 6.9 per cent in the first half of 2017.


However, the BIS itself has been a prominent advocate for caution on Chinese growth, saying in its annual report that pressures building up into a situation similar to the run-up to the global financial crisis.


Chinese authorities are alert to the growing debt levels, and has acted to try to rein in debt, according to Daryl Liew, head of portfolio management at Reyl Singapore. He said: "I would expect these figures to moderate in the second quarter as the government has since tightened liquidity conditions to reduce leverage in the financial system.”


The BIS’s so-called credit-to-GDP gap “early warning” indicator shows debt is building up far above long-term averages. China’s ratio stands at 24.6, according to the BIS, indicating its banking sector is far more stretched than the UK or US, which show negative readings on the same scale.


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