Is This A Ticking Time Bomb For Singapore Banks?

During the global financial crisis, many banks in the US saw their values plummet. The subprime mortgage meltdown affected many banks, even those that were focused on the plain-vanilla traditional savings and loans banking business. In Singapore, even our largest financial institution was affected.

There could be another big grey cloud forming in the horizon near our shores.

China is seeing asset-management products grow alarmingly. According to a Bloomberg report, asset-management products in the country have reached about 60 trillion yuan (S$12.4 trillion) as of 30 June 2016. That is around 75% of China’s gross domestic product.

At the peak of the subprime mortgage bubble in the US, the value of subprime mortgages was estimated to have peaked at US$1.3 trillion in 2007. The current market size of China’s asset-management products is some six times the size of the US subprime mortgage market at its peak.

Many investors are invested in the wealth-management products in China because they assume that the Chinese government would step in to bail out the products if default risk materialises.

However, given the raw size of the market, how much can the Chinese government do? And if there is indeed a crisis looming in the Chinese financial markets, will Singapore be affected?

Given that China is Singapore’s largest trading partner, it is hard to imagine a Chinese crisis that sees Singapore escape unscathed. And if Singapore’s economy is affected, it’s likely that our financial institutions will be too. Moreover, all three major banks in Singapore – DBS Group Holdings Ltd (SGX: D05)Oversea-Chinese Banking Corp Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11) – have businesses in China and/or have identified China as a major growth market.

There is no way of knowing when or if there is a bubble waiting to burst in the Chinese financial markets. But, it is still a burning risk investors need to be aware of when investing in financial institutions in Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of United Overseas Bank. Motley Fool Singapore writer Stanley Lim does not own shares in companies mentioned above.