U.K. banks bear brunt of exposure to China: BIS

Amid growing concern about recent stress in China’s real estate sector, new international banking statistics show that banks in the U.K. have the largest potential exposure.

The Bank for International Settlements (BIS) released its latest data on global banking activity, which showed that foreign banks’ collective claims in China were over $970 billion (all figures are in U.S. dollars) at the end of the second quarter.

Banks’ exposures to China represent almost 18% of claims on emerging markets in total, and are more than double the claims on other major emerging markets such as Mexico ($400 billion), Brazil and Korea ($350 billion each).

“On the borrowing side, global banks have increasingly channelled funds to the non-financial private sector in China,” the BIS report said, noting, “claims on this sector reached almost $450 billion, up some 40% since early 2020.”

Over the same period, banks’ exposures to non-bank financial institutions in China are up by about 31%, it noted.

Additionally, the report said banks have another $180 billion in “other” potential exposures to China, including derivatives, guarantees extended, and undisbursed credit commitments.

These exposures are concentrated in a handful of banking systems, the BIS said.

“U.K. banks, the largest creditors to China, had exposures of $258 billion by mid-2021, up by more than 20% since end-2019,” it said, plus another $40 billion in “other” potential exposures.

The report said U.S. banks and, to a lesser extent, Japanese banks “also reported elevated exposures” to China, including $139 billion and $99 billion in on–balance sheet claims, respectively.

China’s other major creditors include banks based in Korea, Taiwan and France.

At the same time, the BIS reported that its global liquidity indicators, which track credit to non-bank borrowers, generally held up in the second quarter of 2021.

Foreign currency credit in U.S. dollars was up by 5% year over year in Q2, and credit is euros grew by 4%, while credit denominated in yen was down over the same period.

“In all three currencies, foreign currency credit from bond markets grew more vigorously than did lending from international banks,” the BIS said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.