Its fair to say that Chinas equity market has become rather erratic during the past few weeks and months. A staggering $3trn has been wiped off the value of Chinese equities after a three-week slump. Despite the authorities best efforts, the market is struggling to regain its composure.
Unfortunately, its not just Chinese investors that are feeling the effects of the countrys bear market. There are now some signs that declining stock prices are forcing investors to sell their houses to recoup losses.
Property problems
At the beginning of July, Chinas securities regulator announced thatpropertyhad become an acceptable form of collateral for margin traders. But five days later, a number of Chinese real estate agents reported that investors were rushing to sell their properties, at a 10% discount to the market price, in order to cover losses from equity investments.
For Asia-focused lenders,Standard Chartered(LSE: STAN) andHSBC(LSE: HSBA) this could be rally bad news. If investorsreallyare looking to dump property to meet margin calls, it could spark a wave of selling across Chinas already weak property market. This could in turn, force highly leveraged property developers out of business. The knock-on effects throughout the regional and global economy could be disastrous.
Difficult to tell
Its difficult to tell how banks like HSBC and Standard would cope if a portfolio of Chinas debt mountain suddenly turned bad. Although, its reasonable to assume that the two banks would face a hefty bill.
China is heavily indebted. Between 2008 and 2014 non-financial corporate debt grew at a rate of 24% per annum and at the end of 2014 the countrys total debt pile amounted to 220% ofgrossdomestic product. Around 15% of the countrys annual GDP is now funding interest payments.
This could become a problem for HSBC. The banks new strategy, to withdraw from international market like Turkey, Brazil and possibly even the UK, redeploying assets inthe Pearl River Delta and Southeast Asia, will leave the bank overexposed to Chinas indebted economy. City analysts have already expressed their concern at the banks decision to go overweight China, at a time when the countrys future is uncertain.
Still, in the short term, cutting 25,000 jobs and realigning its operations to focus on China should boost HSBCs growth. However, a lack of international diversification could hold back the groups long-term growth.
Regional control
Standard Chartered has enough problems on its plate without having to worry about Chinas debt.
Nevertheless, the groupsstructural overhaul to shift capital and power to new regionalhubs should ensure that the group has an experienced regional management in place if the economic situation within China deteriorates. By removing overlapping layers of management, Standard hopes to cutmore costs beyond the $1.8bn in savings over three years it announced recently. HSBC already employees the regional hub model.
Unfortunately, Standard is already facing mounting losses from its exposure to commodity markets within Asia. Its estimated that the bank will need to raisebetween 5bn and 10bn to cover non-performing loan losses and recapitalise the balance sheet after. As the prices of key commodities have only fallen further since this estimate was produced, the banks losses could be even greater than initially expected.
But don’t just take my word for it.I strongly recommend that you do your own research before making a trading decision — you may come to a different conclusion.
And to help you assess Sirius, our top analysts have put togetherthis new report entitled,“How YouCould Retire Seriously Rich“.
This is a new report from The Motley Foolthattakes you throughthe seven essential steps you need to take to become a stock market millionaire.
What’s more,thereport fromexplainshow spending just 20 minutes a month could help you create a portfolio that could bring you closer to financial freedomfor life.
Click hereto check out the report–it’s completely free and comeswith nofurther obligation.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.