An escalation of trade tensions could add to defaults in China’s financial system, which is already in the midst of a deleveraging campaign, JPMorgan Chase & Co said.
If US President Donald Trump imposes sweeping tariffs on Chinese imports later this week, there will be spinoff effects on the country’s financial sector, JPMorgan Asia Pacific vice chairman Jing Ulrich (李晶) said.
Consumer demand and the wider economy are likely to weaken and that might “translate into worse credit quality down the road,” Ulrich said in an interview in Hong Kong on Friday.
That would add to some Chinese firms’ repayment difficulties at a time when the country is already seeing bond defaults, she said.
Bank shares on Monday fell sharply of the Friday deadline for a decision on whether Trump is to slap tariffs on US$34 billion of Chinese goods, a move that Beijing has vowed to match.
China’s smaller banks are most vulnerable to the outbreak of a trade war, Ulrich said.
China’s steps to cut debt are already straining liquidity in its banking system. The nation’s broadest measure of new credit slumped in May to the lowest in almost two years.
Net financing by company bond sales turned negative for the first time since June last year, with more debt maturing than was issued, People’s Bank of China data showed.
Even so, China is better placed than most of its emerging-market peers to weather any trade war, Ulrich said.
Effective currency and capital controls have contained outflows, market valuations are “much more reasonable” than they were during the meltdown of 2015 and China’s biggest banks benefit from strong capital ratios, she said.
JPMorgan predicts that China will lower borrowing costs for cash-strapped companies, such as small firms and those in the property sector, to avert a rise in delinquencies. The bank is penciling in two further cuts in reserve requirements later this year as a way to stimulate more lending and ease pressure on Chinese companies.
“The risk can be reduced, by releasing more liquidity,” Ulrich said. “China’s leadership has more tools at hand.”
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