The UK central bank has warned of the potential for the Chinese economy to suffer a “hard landing” as a result of unrelenting credit growth.
Analysts from the Bank of England say that despite the launch of a concerted deleveraging campaign by Beijing several years ago, China’s credit expansion remains one of the largest in history, and is a likely forerunner of crisis in future.
“China’s credit boom is one of the largest and longest running ever recorded,” wrote BoE analysts in a recent study. “Similar credit booms have typically preceded crises in other countries.”
BoE analysts say that tough times for the Chinese economy will have a major adverse impact upon the UK, given its high levels of exposure both directly and via Hong Kong.
“Unlike most countries the UK is unique in having both sizeable direct exposures to mainland China, and indirectly via UK banks’ exposures to Hong Kong.
“Together, UK Banks’ exposures to mainland China and Hong Kong exceed exposures to the US, euro era, Japan and Korea combined, despite the uK economy being a 15th of the size of these economies combined.”
Should crisis befall China and its national income decline by 10%, this would result in a 1.4% contraction in the UK economy as a result of reduced trading volumes.
The analysts further point out that financial markets would likely “amplify” the impacts of a crisis by as much as double.