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Will Chinese banks fail?

Ratings agency Fitch recently warned that issues are starting to emerge in China’s bank liquidity. This was recently highlighted when the Shanghai Interbank Offering Rate jumped from around 4% towards 10% in a matter of days signaling a heightened level of financial stress within the industry. Since the Lehman crisis in 2008, China’s outstanding debt has increased from $9 trillion to $23 trillion according to Fitch Ratings.

ANZ (ASX: ANZ), Commonwealth (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac (ASX: WBC) all survived the GFC admirably, although it shouldn’t be forgotten that they all required government support. The level of support provided to Australian banks was nowhere near that required by US banks such as Bank of America (NYSE: BAC) however our domestic banks were still vulnerable. No doubt the Chinese government would rally to support its banks too; however given the potential size of the debt problem and how much money has already been pumped in to economic stimulus projects, question marks remain over how much firepower the Chinese government has left.

Foolish takeaway

The GFC has taught investors that it is important to be alert to unexpected shocks or ‘black swan events’. The well-publicised debt levels and excessive spending in China mean that a bank failure in China should perhaps not be considered a ‘black swan event’ but rather a known risk that investors should be alert to.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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