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On the Edge: Are Chinese Banks About to Bust

Chinese Banks About to Bust

For some time, there has been a great deal of talk in regards to a potential contraction of the Asian marketplace. While this has indeed included a certain amount of speculation, the fact of the matter is that there are already several warning signs that this region (China in particular) may be in for some bearish times ahead. What recent news has emerged and more importantly, how might this impact the world of online trading between now and the first financial quarter of 2017? The answers to these questions are critical to anyone who wishes to enjoy an investment edge.

Rumblings from the Banks

It can be argued that the first concrete sign of trouble ahead has just recently come to light. A report compiled by the Bank for International Settlements (BIS) indicated that the Chinese credit-to-GDP ratio is disproportionately high (1). In essence, this ratio is a benchmark indicator of how much money the country has borrowed in relation to the revenue generated by its gross domestic product (GDP) output. Any figure above 10 is said to signal that troubling times may soon emerge. The latest study illustrated that this ratio was as high as 30.1 during Q1 2016.

To put things in perspective, 2015 saw a ratio of 25.4. This was around the same time that rumblings began to emerge in regards to the solvency of one of the largest economies in the world. The main issue is that as these numbers continue to diverge, the likelihood of a full-blown banking crisis increases.

Lending Issues

It is surmised that one of the main reasons behind a rather gloomy forecast is associated with the massive loans that were provided to both private and public borrowers since the 2007-2008 financial crisis. Leading sources such as the International Monetary Fund estimate that the aggregate amount of these loans could exceed $1.3 trillion dollars. What proportion of these loans are at a risk of default and should this occur, could we possibly see a run on the banks themselves by the average consumer?

Increased Sensitivity

The recent figures emerging from China seem to have been placing a strain upon markets which are considered quite sensitive in light of the recent Brexit referendum. There are two important questions to address:

  1. How likely is it that China will enter into a banking crisis in the near future?
  2. How would markets and investors respond to such an outcome?

The first question is rather difficult to determine, as Chinese policies are not as open when compared to some of their European counterparts. If anything, we would likely see a devaluation of the renminbi when paired with other currencies such as the dollar, the pound and the euro. Whether or not this contagion spreads throughout the global manufacturing sector is yet to be seen. Answering the second question requires a more circumspect approach.

Taking the Good with the Bad

The first rule of online trading is that there is always money to be made on the open markets. This is true whether speaking of Forex pairs, commodities investments, CFD positions or binary options. The only real decision is how investors choose to capitalise upon any perceived negativity out of China.

For example, one effective strategy could be to wait for the renminbi to reach a firm level of support before buying back in. It is likely that a substantial profit could be turned (assuming that resistance levels are known beforehand). Should the Chinese currency become undervalued, it is likely that the prices of many other domestic assets will similarly fall within a short period of time. Once again, this situation could present a lucrative opportunity for any trader who appreciates supply-and-demand economics.

Keeping Ahead of the Curve

Should news emerge that Chinese banks are in for a difficult time, quick reactions will be required. This is the main reason why professional traders keep abreast of the latest economic data by following authoritative sources such as CMC Markets. Those who instead choose to adopt a watch-and-wait approach could find that they have not been able to take advantage of any short-term volatility.

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Bethany Heine is the author of the articledirectorynews.com. He wrote many best articles for the people. She always tries to share the latest news and information with others.