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S'pore banks exposed to slowing China

Publication Date : 28-02-2014

 

Bocom Financial Leasing, a Chinese state-linked firm handling aircraft and ships, last week borrowed 700 million yuan (S$145 million) from the Singapore branch of Shanghai-based Bank of Communications.

The transaction, which got the Chinese firm credit at cheaper rates in Singapore than at home, underscores the fast-growing economic linkages between the Asian financial hub and the world's No.2 economy.

Those connections extend to Singapore banks, such as DBS Group, that are enjoying strong growth in the China market, driving up the gross flow of loans and deposits from Singapore to the mainland by 85 per cent since the 2008 financial crisis.

But even as Singapore plugs firmly into the world's biggest emerging market, worries are rising - including at the Monetary Authority of Singapore (MAS) - about the island's exposure to the slowing Chinese economy.

In the past week, several analysts have flagged Singapore as the second most vulnerable economy after Hong Kong - in terms of financial risk exposure - if China's growth were to dive, say, to 3.8 per cent, Societe Generale economist Yao Wei's definition of a hard landing.

International banks' lending to China has crossed US$1 trillion, Bank of International Settlements data shows.

Of this, Singapore banks' exposure could be around $48 billion, or upwards of 15 per cent of the country's gross domestic product (GDP), some analysts estimate.

"The bad news is (this) overseas forex exposure to Chinese entities is concentrated in Hong Kong and Singapore... and the exposures have built up rapidly since the global financial crisis," UBS economists wrote to clients last week.

Likewise, BNP Paribas analysts Mirza Baig and Yii Hui Wong have highlighted Singapore - one of three offshore yuan clearing hubs along with Hong Kong and Taiwan - as among the most exposed economies to the "explosive trend" in cross-border lending to China.

While Hong Kong banks' exposure far exceeds that of Singapore, it is the swiftness at which the Republic's loan book to China is climbing that prompts worry.

In December last year, MAS urged Singapore banks to be wary of loan risks to China and India.

Singapore lenders' combined loans to China reached 9.2 per cent of their total loans portfolio last year, said MAS. That compares with about 2 per cent in 2007.

"I don't think the Singapore banks had projected such a rapid growth in China loans, but this reflects their opportunistic strategies - that they are taking advantage of growing trade flows between Singapore and China, and lend more to facilitate that business," said Moody's senior analyst Gene Fang.

DBS, in particular, has been seeing strong growth.

It has ramped up its loans to Greater China - excluding Hong Kong - from 8 per cent at the end of 2009 to 19 per cent of the total portfolio at the end of last year.

To be sure, the China loan books for Singapore lenders DBS, United Overseas Bank and OCBC Bank look in good shape currently. Just about 5per cent of Singapore banks' non-performing loans come from China.

This is "low relative to Singapore banks' exposure to the region", Fitch Ratings analysts told The Straits Times in an e-mail.

"A large part of the loan growth to China for the Singapore banks in recent years has been in the form of trade financing, which is typically shorter in duration than corporate loans, and generally secured against deposits or letters of credit."

Banks like DBS are more buffered as they tend to lend to Chinese clients with diversified operations overseas, so any credit shock within China may not impact them as much, added Voyage Research deputy head of research Ng Kian Teck.

A DBS spokesman said the bank has been managing credit risks carefully as it grows the China portfolio. "In particular, we have kept to our strategy of targeting top corporate customers and focusing on trade loans, with an emphasis on loans backed by bank guarantees," she said.

Meanwhile, with China's capital controls still in place and the pool of offshore yuan liquidity still relatively small in Singapore, the spillover effects of any financial crisis from China to Singapore's banking system are more contained, analysts add.

"Singapore's exposure to China has grown in recent years, but we are talking about a ripple, not a tsunami, spillover effect," said UBS economist Donna Kwok.

For now, the projected returns from tapping China's vast market outweigh the risks. Risk managers can also take comfort that even with China's recent factory activity slowing more sharply than expected, the median analyst forecast for China's GDP growth this year is still a respectable 7.4 per cent.

And International Monetary Fund chief Christine Lagarde said last Thursday that a hard landing is unlikely, describing the Chinese economy as "poorly understood".

That said, China's financial landscape may yet throw up some surprises. A default in its vast shadow banking sector or its 18 trillion yuan mountain of local government debt could trigger economic turmoil around the world.

"A key risk is the lack of transparency about the extent of problems in China's shadow banking sector and how the Chinese government might deal with potential defaults in financial products," said Moody's Fang. "I think it is an indication of MAS' (sense of) caution to be flagging that to the banks."

 

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