The coronavirus, which has closed factories and businesses across China for weeks, will weaken and already weakening Chinese banks.
As much as 6.5 trillion renminbi in loans could go bad if the crisis lasts for months, according to S&P Global Ratings.
The default rate could soar from less than 2 percent in December to 6.3, a rate unmatched in 20 years.
In response, the government has delayed implementing more stringent new bank regulations that were set to take effect. It also has ordered banks to extend loan terms to stave off defaults.
The epidemic could pare at least two percentage points off China’s economic growth rate this quarter and might send it as low as 3.2 percent, analysts at ANZ Bank estimate.
China’s economic slowdown already has sent default rates as high as 40 percent for some small and medium-size banks and forced the government to bail out banks and their depositors.
TREND FORECAST: The more money the Chinese government pumps into the system and the further they push interest rates down to prop up the failing economy, the lower their currency will fall against the dollar.
Importantly, as we have long noted, much of Chinese business debt is dollar based, thus the more their currency falls, the more it will cost to service their debt. In the property sector alone, a major driver of the Chinese economy, property developers must repay some $270 billion over the next two years.
China Evergrande, one of the nation’s largest property developers, owes more than $100 billion in debt. Therefore, as economic conditions worsen, default rates will escalate putting yet more pressure on the government to pump more money into the economy, which will in turn push their currency, the renminbi, to lower levels.
