Fitch sees mainland economy paying high price if property bubble bursts
Ratings agency says lack of transparency in reporting non-performing loans and doubts over official figures add to risk of credit crisis
The bursting of China's property bubble would wipe 1 per cent off mainland economic growth and cause serious problems for the nation's banks, the ratings agency Fitch said yesterday.
"[Property] is our biggest macro concern in China. The fact there is such an overhang of supply … if the market were to collapse it would affect the economy and in turn banks," Jonathan Cornish, Fitch's head of north Asia banks, said at the agency's global banking conference in Hong Kong.
He estimated that a property market downturn would take about 1 per cent off mainland gross domestic product growth rates.
"Clearly if the property market were to slow down very sharply … [that] would have significant implications in terms of potential credit cost," he said.
Analysts were apprehensive about an oversupplied property market in China.
A report from Nomura in March said there was 370 square feet of residential floor space created for each new urban resident in China last year.
At current rates of expansion, this will increase to 670 sq ft by 2017, giving each new urbanite the equivalent of a mid-sized Hong Kong flat.
"The ballooning supply in the pipeline will likely become increasingly difficult for incremental demand to absorb," said Nomura in its report.
Recent data from Deutsche Bank shows Chinese housing starts dropping by a quarter, year on year, with developers' sales down 9 per cent year to date amid wide price declines.
Cornish said problems in the property sector pointed to another serious concern with mainland banks: lack of transparency.
While China's official data showed banks to be robustly capitalised, the Fitch official was sceptical. He pointed to banks' continued use of off-balance-sheet wealth management products and their tendency to continuously roll over non-performing loans without classifying them as such.
"The number two question I get on Chinese banks is, what do I think is the NPL ratio? We've really given up trying," Cornish said.
"Essentially when you've got a financial system where a good third of credit is outside the banks' balance sheets, where you have misclassification of exposures, when you have banks rolling over loans when they should be recording them as NPLs, [this] really has made the NPL ratio so much less meaningful than what you might have in other jurisdictions," he said.
There is also the general unreliability of official data on the Chinese banking system. He said a more meaningful, if indirect, measure could be found in equity markets, where shareholders have sold down the Big Four Chinese banks from a price-to-book valuation of about two in 2010, to less than one today.
This ratio is significant because the Chinese banks are restricted from issuing new equity when trading below book value.
The contrast with the four biggest Australian banks is notable. The Australian banks have high exposure to property and the Australian economy is highly interconnected with China's. However, the big four Australian banks' price-to-book ratio since 2010 has barely budged.
Cornish said the difference was transparency, with equity investors believing the Australian banks' financial ratios.
"Equity investors I speak to believe there is downside risk to [Chinese banks'] earnings, and there is belief that NPLs should be higher than what is being reported," he said.
"There is a school of thought that NPLs will rise significantly. Many are of the view that reported numbers are not right, and I would put Fitch in that camp."