Chinese Banks on Edge

Watching the Chinese Banks

China’s economy has had a rough ride. The stock market has been in freefall at various points throughout the calendar year, and just as things look like they are starting to stabilize in one form or another, another calamity occurs. The latest issue coming from China is the fact that there are warnings of bank failures reverberating throughout the world. A global bank watchdog organization recently warned that certain Chinese banks were at a high risk of failing. Groups like the Bank for International Settlements review banks, and let the rest of the world know which banks are safe, and which are not. According to their most recent quarterly review, many Chinese banks are gauging at three times above the warning level when it comes to a risk of default.

To give you a better idea of what is going on, the BIS uses a numeric scale to evaluate the credit to gross domestic product ratio within a country. A dangerous number, according to this group, is 10. That means that the country as a whole is able to borrow times more than it is producing in the span of a year. That’s a large discrepancy, and one that could spell huge problems. Think of someone that makes $50,000 a year, but has a credit card that allows them to spend $500,000. There’s a ton of potential for that to be misused. Right now, China’s number stands at 30.1. To go with our previous example, that would be someone making $50,000 a year able to borrow more than $1.5 million dollars. That’s an even bigger issue.

Does this mean that Chinese banks will fail? Certainly not. But unless stricter safeguards are put in place—and heavily enforced—there is far greater potential for this to occur than there has been in the past. No one wants this to happen, but the numbers indicate a lot of risk, and being aware of it in your trading is a must.

It’s important to know what your risks as a trader are, and a widespread failure of banks throughout a country, especially one as large and economically significant as China, could have a large negative impact. China is the world’s second largest economy—behind only the United States. To get a decent idea of what could happen, think back to 2008 when the financial crisis in the U.S. shook the world. It took a few years to get domestic markets back to healthy levels after that, and many bank bailouts occurred around the world. The difference is that China is far more insulated than the U.S., and although the repercussions would likely not be as extreme, they would still exist, driving down worldwide economies. At times like this, having the ability to trade in down markets, such as buying selling short and using binary options, will be a strong tool to have on your side.

The best way to prepare yourself for something like this is to simply see how the assets that you trade would be impacted if this were to occur. For example, if you trade U.S. based stocks, are these stocks that rely heavily on the Chinese economy for their success? Some companies do for both production and marketplaces. You would need to evaluate your individual trades before proceeding, and doing this before an emergency situation emerged would be your best choice, if only because it would let you act more quickly and establish early positions if some sort of crash were to take place. Being prepared ahead of time is always easier than learning as you go, even in a case like this.