China, Asia’s largest economy, might face credit losses of up to a whopping $3 trillion, an American investment banking firm has warned. This comes at a time the Chinese Government has ordered an audit of the public debt.
In its report, Goldman Sachs group said that the rapid pace of China’s credit expansion, increasingly sourced from the inherently more risky and less transparent “shadow banking” sector, has become a top concern for global markets.
“Our Asian economists and strategists recently published a comprehensive look at this concern and its implications for economic growth and asset performance in China, calculating that an extreme upper-bound for total China credit losses could amount to 18.6 trillion yuan,” the report said.
The losses could amount to 18.6 trillion yuan ($3 trillion), as the speed of its credit expansion has exceeded that seen prior to other credit crises in history, the report further clarified.
But actual credit losses are likely to be significantly lower than these worst-case figures, emerge gradually and be partially absorbed by bank earnings or other avenues, it said.
The warning came as the Chinese Government, weighed down by mounting debt, last month ordered a nationwide assessment of local government liabilities to address the concerns about rising debt from over—ambitious development projects that is eventually threatening the financial stability of the world’s largest economy.
Goldman Sachs said commodity demand and prices, emerging market economic growth and asset performance would be most at risk from any fallout from China, while some United States assets, especially US domestic-facing equities, rates and the dollar could potentially rise.
Helen Zhu, Goldman Sachs’ chief China equity strategist, said parts of the corporate sector are the greatest source of credit risk, especially sectors with excess capacity, along with local government financing, while the unintended consequences of intentional policy tightening could cause things to go bad.