China economy ‘contagion’ warning after bank’s £576m loss

Standard Chartered’s CFO on bank’s performance

Chinese financial “contagion” may spread to the rest of the world after a British bank lost more than £500million “betting big” on the country, a UK-based expert has warned.

The world’s second-largest economy has been under the microscope in recent months, especially after Country Garden, one of its largest property developers, hit the skids in August.

Reports in the South China Post suggested the company was bracing itself for a loss of between 45billion and 55billion yuan (£4.88billion to £6billion), compared with earnings of £210million in the first half of last year.

Tax consultant Bob Lyddon, the founder of Lyddon Consult, told “Problems in China have now come to the surface at Standard Chartered Bank, which has bet big on the country, buying into China Bohai Bank.”

A “write-down” of that investment by £596million ($697 million) cut Standard Chartered’s profits for the third quarter of 2023 by 54 percent compared to the same period in 2022, Mr Lyddon pointed out.

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He continued: “Standard Chartered has also built up its own portfolio of loans to Chinese borrowers, and not rock-solid ones.

“It has had to create a provision for losses on loans into the Chinese commercial property sector of $186million.

“China Bohai Bank appears to do the retail property lending and is losing its shirt on that, while Standard Chartered does the commercial property lending with the same result.”

Mr Lyddon said Standard Chartered had sought to characterise the loss as the result of what he called “the growing pain of the Chinese” and a rough patch prior to the resumption of normal service.

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He continued: “They would say that, of course, and for the sake of their shareholders let’s hope they are right, and that there is no contagion into UK financial markets.

“From Planet Earth the Chinese real estate market looks like a huge bubble and Ponzi scheme, financed in large part with debt in a foreign currency – US dollars.

“This is against a backdrop of rising interest rates and a Chinese currency whose value will need to reduce if the Chinese economy is to resume normal service.”

Such factors would inevitably increase the interest bill on the debt and magnify the debt’s size in yuan terms, Mr Lyddon pointed out.

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He warned: “That is like turning off the life support for China’s borrowers.

“Standard Chartered is a UK-headquartered bank and this is a thumping loss on a flagship investment into a market the bank sees as core to its future.

“That shows how quickly and directly contagion can hit the UK from China and in what quantity.

“Who knows how big the black hole is in China’s real estate market but the initial loss a bank takes on a bad investment is rarely the last.”

Speaking to CNBC last week, Standard Chartered’s Chief Financial Officer Andy Halford said the “overall performance of the bank is very strong,” despite the news from China.

He said the country’s commercial real estate sector “clearly has been problematic,” but that GDP was forecast to bounce back by about five percent within the next two or three years.

He added: “What we’re seeing is probably a slower recovery post-Covid than in some countries. But it’s a huge population to mobilise after such a big event.

“Most countries would be more than happy to have that kind of growth level.

“So we are very, very much of the view that this is a period that we need to go through.

“We’ll stick with it and as the economy gets going, then that should be good with us and should be good for others.”

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