login
Euromoney CountryRisk logo
  • Global Risk Table
  • Countries
  • Analysis
  • About Us
    • About ECR
    • Methodology
    • FAQS
    • Become an Expert
  • Contact Us

China risk score hits 10-year low amid liquidity crisis

Matthew Turner Tuesday, June 25, 2013

China’s banking sector has emerged as the principal source of sovereign risk, reversing a decade-long trend, say analysts.

China’s ECR score has plummeted to a 10-year low as fears grow that policymakers’ steps to reduce credit growth from mid-tier lenders and leverage in the shadow banking system will exact a heavy macroeconomic toll at a time of softer growth.

China’s ECR score fell by 0.4 points in June to 59.4, indicating mounting concerns of a blow-up in the country’s banking sector.


China’s banking stability now poses the greatest threat to the country’s credit profile, according to ECR analysts.

And the markets appear to agree: CDS spreads of Chinese banks soared by an average of 79 basis points in June, during a one-month period.


Meanwhile, China's sovereign CDS spreads soared 55% during the past three days to 140bp on Monday – the highest rate since the Lehman Brothers crisis.

Allan Dwyer, professor of finance at Mount Royal University, Canada, says: “Chinese CDS blew out yesterday, indicating the biggest perceived risk in Chinese sovereign debt since the Lehman meltdown.

“The central bank officials in China are still learning the game, that the policies taken in one sector of the system can have a dramatic – and negative effect – in other areas.

“As the Chinese economy shows signs of struggling, the PBoC [People’s Bank of China] understands that they must keep the China risk premium to a minimum ... and the CDS market yesterday was telling them the exact opposite.”


China’s increased risk perception reflects the central bank’s reluctance to inject more liquidity into China’s banking sector. Tighter liquidity conditions are coinciding with government attempts to moderate credit growth and rebalance the economy to more sustainable levels of economic growth, while reining in the shadow banking sector.

“Chinese finance officials are in a tough spot,” says Dwyer. “They have to rein in the informal banking sector, which is now enormous in size and influence, but they have to do it in a way which does not impact the overall integrity of banking in the Chinese economy.”

Janis Hübner, emerging markets economist at DekaBank and an ECR expert, reckons the central bank’s initial reluctance to reduce reserve requirement for banks underscores how “the government may prove it is more willing to get serious about looking for quality of growth instead of the level of growth”.

However, Hübner reckons liquidity conditions and a more prudent monetary policy could ignite a steeper slowdown in economic growth in the longer-run.

“We might see slower credit growth, especially in the shadow banking sector and all this will weigh negatively on growth, which means we might see a steeper slowdown in growth than we expected even a couple of weeks ago,” he says.

The recent liquidity tightening in China’s interbank market led economists at Goldman Sachs to cut the country’s growth forecasts. Goldman is now forecasting the Chinese economy to grow by 7.4% in 2013, down from a previous estimate of 7.7%.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.


Recent articles

  • ECR survey results Q3 2022: Political risk is heightened by conflict, inflation and tightening financial conditions

  • ECR survey results Q2 2022: Covid, war and stagflation risks perplex investors

  • ECR survey results Q4 2021: EMs on back-foot as the year ends

  • ECR survey results Q3 2021: CEE shines but Brazil, Nigeria and other EMs recoil from global investing roadblocks

Euromoney CountryRisk logo

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our  Terms & Conditions ,  Privacy Policy and Cookies before using this site.


All material is subject to strictly enforced copyright laws. Euromoney Country Risk is part of the Delinian Group Delinian Limited 8 Bouverie Street London EC4Y 8AX Registered in England and Wales, Company number 00954730 Copyright © Delinian Limited and its affiliated companies 2023

  • Methodology
  • FAQs
  • Articles
  • Contact us
  • Modern Slavery Act Transparency Statement