Banks in Asia's trade-dependent developed markets would face the most pressure on their credit profiles in the event of a sharp slowdown in the Chinese economy, said Fitch Ratings recently.
Banks in these markets are among those with the strongest underwriting standards and risk controls in the region, but the downturn in economic conditions would test asset quality and add to their existing profitability challenges, the rating agency noted.
According to Fitch, its hypothetical scenario models the economic impact of a sharp Chinese economic slowdown sparked by the US imposing additional tariffs of 25% on around US$300 billion of Chinese imports.
The tariff impact is sharply amplified by a separate investment shock involving a substantial retrenchment in investment activity against the backdrop of corporates' need to ease balance-sheet pressure and preserve liquidity amid weaker demand, Fitch added.
Chinese GDP growth would trough at 3.4% in 2020, compared with a base case of 5.9%, before recovering to 4.2% in 2021, the company said.
A severe slowdown in China would affect Asia Pacific banks through three main channels—direct losses on mainland exposure, broader stress from a weaker regional economic environment, and market risks from a negative shift in global investor sentiment, Fitch said.
Outside of mainland China, Hong Kong banks have the most direct exposure to a Chinese slowdown, with claims on the mainland accounting for 30% of Hong Kong's system assets at end-2018, Fitch noted.
Hong Kong and Singapore—along with South Korea and Taiwan—would also be hit the hardest through macroeconomic knock-on effects, given their close trade links with mainland China, according to the credit rating agency.
