Why UK Investors Will Suffer If The Chinese Debt Crisis Explodes

The FTSE 100 (INDEXFTSE:UKX), HSBC Holdings plc (LON: HSBA) and Standard Chartered PLC (LON: STAN) will all suffer in the event of a Chinese debt crisis.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Over the past six months, while events have been unfolding in both the Middle East and Eastern Europe, the market has kept one eye firmly fixed on China’s debt mountain.

Towering debt

It’s no secret that China has a debt addiction but this addiction has got out of hand recently.  

Indeed, according to recent figures supplied by Standard Chartered (LSE: STAN), China’s total debt load is now more than two-and-a-half times the size of its economy. But it’s not the size of this debt pile, it’s the speed of how quickly debt is rising which is worrying.

For example, during the last six months alone China’s debt-to-GDP level has jumped by 17 percentage points. Last year it took 12 months for growth of 20 percentage points.

With debt exploding, City analysts have started to become concerned about the health of China’s economy. Moreover, analysts are worried that the debt bubble will suddenly pop, causing a regional credit crisis.

Will feel the effectsStandard Chartered

There’s no doubt that the FTSE 100 (FTSEINDICES:^FTSE) will feel the spill over effects from a Chinese credit crunch. Unfortunately, the two companies that are most likely to be affected are HSBC (LSE: HSBA) (NYSE: HSBC.US) and Standard Chartered. 

As a predominantly Asian bank, Standard will feel the most paid if the Chinese debt crisis blows up. It’s likely that fallout will reverberate around Asia and Standard will be drawn in.

Still, Standard has been de-risking its loan portfolio over the past few months, which has hit results. However, if things really do start to get messy within China, the bank will be better positioned than most.

What’s more, the bank revealed within the past few days that, to preserve capital, management has scaled back expansion plans. The bank is also pulling back from deals.

Some investors have interpreted this move as a sign that management has lost its way, but pulling back from credit markets could be a shrewd move by the bank, as it seeks to protect itself in uncertain markets.

HSBCPlaying down risk

Meanwhile, HSBC’s management has played down risks of a Chinese credit crunch. Indeed, the bank has acknowledged that some defaults are unavoidable, although the bank’s exposure to bad debt is minimal.

Additionally, management believes that a number of credit defaults across Asia are likely to encourage future fiscal prudence, which is long-term positive for the region. HSBC had an industry leading tier one capital ratio of 13.6% at the end of the first quarter and the bank continues to de-lever its portfolio. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool owns shares of Standard Chartered.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »