A systemic banking crisis in China in the next three years is highly unlikely, according experts in the Asia Forecasting team at risk advisory, Exclusive Analysis. Even with increasing volumes of non-performing loans, vulnerabilities identified in the property sector and the likelihood of Chinese banks exceeding 2011 lending targets, strong political buffers exist to prevent a crisis comparable to that faced in the US or Europe, implying a safer environment for investors than recently suggested.

These conclusions are detailed in the risk advisory's new report China’s Political Buffers to a Banking Crisis.

Amidst fears of overheating in the Chinese property sector, the government has intervened aggressively in the property market, and has also increased its monitoring of loans to local government entities. Exclusive Analysis concludes that while there are some possible regional difficulties, the Chinese property sector does not pose a systemic risk to its banking system in the next three years. Individual home buyers and property developers, the say are not heavily leveraged in China and government efforts to cool the property market are likely to take effect over time. Property is almost certain to remain the most attractive investment for the majority of Chinese investors.

Increased combined profits, over US$100 billion within the last two years, and significant capital raised have added to bank reserves and increased their ability to absorb write-downs. Further, the presence of loan transfer mechanisms reduces risk of local or regional bank collapse, providing an effective mechanism to manage impaired assets and problems within smaller regional institutions.

Exclusive Analysis’s Asia team further highlighted the unprecedented size of China’s foreign exchange reserves, its limited international debt and low budget deficit. These provide a favourable platform for sizable capital injections to troubled banks if they should become necessary. A decade ago, China’s NPL ratio was above 50%; at present it is down (officially) to 1.1%.

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