China's Shadow Banking Bubble: Assessing The Regional Threat

BMI View: Concerns that a collapse in China's shadow banking system could lead to a region-wide Emerging Markets crisis are overblown, given the limited direct financial linkages and the healthy state of Asian balance sheets. We believe that developed markets within the region, such as Australia and Japan, face the greatest risks from the indirect impact of a slump in Chinese demand. Asian FX should hold up relatively well versus the Chinese yuan, while property markets in the region face significant downside potential.

With China's banking sector instability increasingly coming to the fore, the potential impact of a collapse of the shadow banking system on other emerging markets has been hotly debated. Given the fragile state of Emerging Markets (EM) globally, there is heightened concern that Chinese financial weakness could exacerbate this trend, triggering a full-blown EM crisis. Within Asia, we believe that concerns of a 1997-style Asian Financial Crisis are overblown, as regional balance sheets are in much better shape. That said, as the major source of export growth for most economies in the region, economic activity will suffer across the board. In general, rather than Emerging Asia facing crisis risks, we find that the region's developed economies are most at risk from a China-driven shock.

The China View

Slowdown Just Beginning
China - Real GDP Growth, % chg y-o-y

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