China’s banking system will be seriously tested by the fallout from the coronavirus outbreak, which could derail growth and trigger a spike in bad debt if banks are told to lend to virus-hit sectors of the economy, analysts said.
The virus outbreak, which has killed more than 2,000 people and infected more than 74,000, is expected to cut China’s gross domestic production (GDP) growth by 1-2 percentage points in 2020 and drag it down to 3 per cent or lower in the first quarter. Many analysts say the economic toll will be greater than that of the severe acute respiratory syndrome (Sars) epidemic in 2002-2003.
A recent stress test conducted by China’s central bank showed that nine of 30 local banks would fail to meet their capital adequacy ratio if growth slipped to 5.3 per cent, and 17 of them would fail if it slowed to 4.15 per cent.
As the coronavirus outbreak continues, growth as low as 5 per cent is turning into a reality and many analysts believe China may be forced to slow its two-year-old campaign to curb debt in the financial system if it wants to boost the economy.