“A credit crunch is highly probable,” said the bank in a report entitled “Deflation, Devaluation, and Default”, written by David Cui and Tracy Tian.
They said the country’s highly-leveraged companies cannot safely withstand President Xi Jinping’s drive to stamp out moral hazard and wean the country off excess credit, warning that the mix of slower growth and excess debt “could prove lethal for the financial system”.
The report warned that it is rare for countries to escape either a financial crisis, or major bank failures, a currency upset, a sovereign crisis – or a mix of these – after letting credit grow at such vertiginous rates.
“The most likely scenario is a bad debt surge as growth slows, followed by a credit crunch in the shadow banking system, followed by a major recapitalisation of the banks,” said Mr Cui.
The report said China spent 15pc of GDP to rescue lenders in the late 1990s but the scale of the problem is much greater today, and this time the government cannot resort to fresh stimulus so easily.
Loans have jumped by roughly 100pc of GDP in the past five years under most estimates. This is twice the pace of growth in Japan over a comparable period before the Nikkei bubble burst in 1990, or in the US before the Lehman crisis in 2008.
Standard Chartered said total credit has surpassed 250pc of GDP once shadow banking and offshore lending are included, an extremely high level for an emerging economy without mature markets or layers of accumulated wealth.
Mr Cui said the explosive rise on the Shanghai stock market - up 50pc in barely three months - is being driven by “blue-sky talk” and $180bn of margin lending from brokers. It is happening at a time of deteriorating earnings. “When the sell-off happens, we suspect that it will not be orderly,” he said. The Shanghai composite index may fall back from 3,300 to 2,400 before it settles in a trading range.
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