To date, China's banks have not experienced anything like the cataclysms that rumbled through U.S. and European institutions between 2007 and 2009. Neither have their problems resulted in any significant shortages of credit: Retail sales in China rose 11 percent in December 2015, and housing sales have begun to rebound from an earlier dip.
The U.S. financial crisis drove a near-50 percent drop in sales of new cars and trucks, and a collapse of the market for new homes, driven largely by unemployment fears and problems getting deals financed. Even seven years later, the mortgage market remains dependent on government-backed Fannie Mae and Freddie Mac, despite the hopes of Congress and the Obama administration to have turned over their role of providing financing to lenders to the private sector by now.
Neither are the biggest U.S. institutions showing signs of worrying about their China exposures. Citigroup was the only Big Six U.S. bank to discuss China in detail on its most recent conference call, saying it has about $20 billion in total exposures as of last Sept. 30 — about a third of that in government bonds and less than $9 billion of commercial loans. In October, JPMorgan Chase said it had only minor exposures to China's markets to facilitate client trading.
That said, China's banks are in worse shape than a year ago, by many measures. Reported loan delinquencies have risen to 1.59 percent of loans as of Sept. 30, up from 0.95 percent at the end of 2012, Moody's Investor Service says. And critics have seized on banks' decisions to classify fewer loans whose borrowers are more than 90 days late on their payments as non-performing, saying banks and the government are trying to paper over the extent of a fast-growing problem.
Moody's Investor Service cut its outlook for China's bank sector to negative from stable, on Dec. 11. It pointed to the loan-loss problems, as well as an increase in overall borrowing to 209 percent of gross domestic product, from 193 percent a year ago, that it says raises systemic risk.
But all four of China's largest commercial banks, each majority-owned by the government, are still rated A1/Stable — six notches above speculative grade and higher than all six of the top U.S. banks, which are rated A2 or A3. Bigger problems lurk in smaller Chinese banks that are less systemically important, the ratings agency said.