Readers will have noticed that I have no love for the Chinese baking sector. With huge loans to local governments and others, which probably can’t be repaid as a result of the credit spree after the 2008 financial crisis, it is only a matter of time until problems surface. Thus we have seen very poor performances by banking shares in China.
There is a widespread belief that Chinese banks are a safe investment because they can’t possibly go bankrupt. After all, the government will be there to back-stop. I don’t disagree with the judgment, but have often joked that we will probably see an outcome similar to RBS, with Chinese banks still around but equity holders wiped out.
Credit markets are also now showing distrust in Chinese banks. Credit default swaps spreads for Bank of China and China Development Bank have surged according to Société Générale, and they are rising at much faster rates than the rest of Asia ex. Japan:
