With many Taiwanese banks aggressively expanding their operations across the Taiwan Strait, the sector’s outstanding international claims on China — including offshore banking units — totaled US$94.09 billion at the end of September last year on an ultimate risk basis, having risen continuously from the US$92.65 billion recorded in June, central bank statistics showed on Friday.
The statistics indicated that at the end of September, China remained Taiwan’s largest debtor, a position it has held since the third quarter of 2013, when domestic banks’ international claims on China outranked those to Luxembourg for the first time.
Taiwanese banks’ exposure to China has shown no sign of letting up. In July last year, Fitch Ratings forecast that by 2016, this exposure would be double the 2013 levels, amid warming cross-strait business ties.
On Saturday, the Financial Supervisory Commission released statistics about the banking sector’s overall claims on China, which showed the sum standing at NT$1.75 trillion (US$54.8 billion) at the end of November last year. While the figure represented 68 percent of the sector’s total net worth of NT$2.58 trillion as of November and so remained below the commission’s regulatory ceiling of 100 percent, it was 45 percent higher than the NT$1.2 trillion recorded a year earlier.
The latest data released by the commission also showed that loans to Chinese businesses extended by Taiwanese banks totaled NT$134 billion as of November, translating into a ratio of 0.52 percent of their total outstanding loans of NT$2.589 trillion.
Although the sector’s non-performing loan (NPL) ratio was 0.24 percent at the end of November for domestic banks’ loans to Chinese firms — lower than the average NPL ratio of 0.28 percent for Taiwanese banks — the rapid expansion of lenders’ exposure will become more of a risk if their active moves fail to generate strong earnings and if they become vulnerable to default in the face of China’s economic slowdown and rebalancing risks.
It is reasonable that domestic lenders pursue overseas investment to foster long-term growth, since their profitability is under pressure from rising competition. While overseas expansion is never risk-free, investing in China requires banks to pay extra attention to market transparency and risk management, as there have long been suspicions about the accuracy of the information and statistics provided by Chinese businesses and provincial governments.
China is the world’s second-largest economy and its influence on the global economy has increased, so it is not only Chinese policymakers who need reliable statistics to guide resource allocation, but also foreign businesses, which demand accurate data when investing or conducting other business there.
However, several Taiwanese banks are facing defaults on more than US$210 million of syndicated loans to two debt-ridden Chinese firms: China Lumena New Materials Corp and Ultrasonic AG. In addition, China’s credit markets have recently shown signals of strain amid slowing growth, issuing a reminder that things could get ugly. Instability in China would threaten the Taiwanese banking sector — if banks do not impose appropriate risk management to their loans to China or if Taiwan’s financial regulator fails to efficiently and strictly supervise banks’ operations across the Taiwan Strait.
Last week, Bank of America Merrill Lynch warned that China might see a surge in bad debts this year, followed by a credit crunch in its shadow banking sector, as well as a major financial system restoration amid Beijing’s efforts to avert a sharp slowdown.
Domestic banks’ rising exposure to China reflects Taiwan’s high leverage and heavy trade reliance on China, but it also means that the government needs to be well-equipped to manage any major shocks that may come from across the Strait.
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