With rising default risks from Country Garden Holdings Co to China’s leading asset management firm, Zhongzhi Enterprise Group Co, concerns are growing that a slump in the Chinese property market could trigger a wider financial crisis, creating a potential spillover effect that would impact the broader economy. Analysts worry that it would lead to a “Lehman moment” for China if Beijing stops short of interventions to stem any domino effects its financial system might experience.
The term “Lehman moment” refers to a situation in which the problems of one company or one seemingly minor component of an economy turn out to be so large that they become everyone’s problem, just like the bankruptcy of Lehman Brothers Holdings Inc in September 2008, which triggered a broader market rout for US stocks before developing into the global financial crisis of 2008 and 2009.
It remains unknown if a Lehman moment would take shape in China, but what is already certain is that the ongoing downturn in China’s property sector can be expected to persist for a while, and the systemic risks from rising defaults might hurt its economic growth further. Against this backdrop, the People’s Bank of China unexpectedly cut its key interest rates on Tuesday, two months after its previous cut, but there is an increasing consensus that the Chinese central bank might need to cut rates further and extend its monetary easing to ensure ample liquidity in its financial system.
The fast-rising economic risks in China might come as a surprise for some, but given the latest developments related to its property developers and investment trust firms, Taiwan’s financial institutions’ efforts to reduce their exposure to China over the past few years have been reasonable and correct. While the three major financial industries in Taiwan — banking, insurance, and securities and futures — reported aggregate exposure of NT$1.12 trillion (US$35.06 billion) to China as of the end of June, the risks are controllable, the Financial Supervisory Commission (FSC) said on Tuesday.
Taiwanese financial firms have slashed their exposure to the world’s second-largest economy quickly and sizably. The FSC’s data found that Taiwan’s financial holding companies’ aggregate exposure to China dropped to a historic low of 8.62 percent of their combined overseas investments at the end of June, while Taiwanese banks’ Chinese market exposure — including corporate lending, investments and interbank loans — also fell to NT$1.01 trillion as of June, or 23.91 percent of their combined net worth, both the lowest levels on record.
The result should come as no surprise to anyone. Financial institutions in Taiwan and around the world are often under special supervision and strict regulation, because their activities and services would directly influence economic performance and consumer rights. They are highly sensitive to risks and naturally adjust their overseas investments or credit profiles when they see fit.
Bad news has repeatedly broken out in China’s real-estate industry in recent years with the risk of a snowballing economic downturn. A broader sense of nervousness had already emerged among investors as early as in the second half of last year, creating no reason for Taiwanese banks to increase investments or loans in China. Instead, if there was a chance for them to reduce investment holdings or tighten credit lines, they would not hesitate to do so.
However, more actions are still needed if Taiwanese financial firms aim to promptly respond to any major financial events in China. To tackle headwinds, firms must review and adjust their holdings of Chinese securities and bolster risk management after extending loans to the Chinese market.
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