Will A Chinese Banking Crisis Bankrupt HSBC Holdings plc?

How much will a Chinese credit crisis hurt HSBC Holdings plc (LON: HSBA)?

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After years of easy credit and rapid growth, it would appear that the Chinese economy is finally starting to slow and investors are becoming wary about the region’s prospects. There are also growing concerns about the China’s rising level of debt and some analysts now believe that a credit crisis is about to engulf the Chinese banking system.

As an Asian banking giant, a Chinese credit crisis could be really bad news for HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) but will it be game over for the bank?

Situation deteriorating

It’s no secret that Chinese corporate debt has ballooned during the past few years. However, Chinese authorities have now decided that it is time to tighten credit conditions as part of their attempt to engineer a soft landing for the world’s second largest economy. As a result, China’s first ever corporate debt default occurred at the beginning of March, when Chaori Solar could not find enough cash to meet its interest obligations.

hsbcChaori’s collapse was then quickly followed by Zhejiang Xingrun Real Estate, which defaulted on $566m of debt. And then, soon after Zhejiang’s collapse, China’s banking industry regulator was forced to reassure savers after a run on Jiangsu Sheyang Rural Commercial Bank, which was rumoured to be close to liquidation. Finally, within the past few days, a small construction materials company defaulted on interest payments for $29m worth of bonds.

This wave of bad news during last 30 days, comes after several years of stable credit conditions within the country. 

Complicated market

Unfortunately, due to the size of the Chinese economy, it is unlikely that HSBC will be able to avoid the fallout from a credit crisis within the region.

What’s more, analysts are becoming increasingly worried about the carry trade, a practice where wealthy individuals borrow money from banks within Hong Kong, to invest within China for a higher rate of interest. It is estimated that this market is worth up to $200bn and a rapid unwinding if markets fell, could lead to a widespread Asian financial crisis.

The threat of this carry trade risk was recently brought to light by two analysts at Forensic Asia, a recently launched boutique Hong Kong research firm. These analysts put together a report suggesting that HSBC between $63.6 billion and $92.3 billion of “questionable assets” on its balance sheet, related to the Asian shadow banking market and client carry trades. I must stress however, that these claims have not been proven. 

Foolish summary

Overall, the risk of an Asian banking crisis bankrupting HSBC is small, as the bank’s management should have taken precautions to bolster the balance sheet.

However, the size and integration of the shadow banking sector within Asia could mean that the situation changes faster than HSBC’s management can react. With that in mind it might be easier to stay away from the bank for the time being until China’s economy stabilizes. 

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 does not own any share mentioned within this article. 

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