British banks could be most vulnerable to China economic meltdown

British banks could be most vulnerable to economic meltdown in China, according to Bank for International Settlements data

British banks could be the most vulnerable to an economic meltdown in China, according to Bank for International Settlements data. 

UK lenders are the largest creditors to China, the Basle-based group found, with around £187billion of loans tied up in the country at the end of June – up by more than 20 per cent since the end of 2019. 

The numbers are likely to worry analysts and the Bank of England amid fears of a debt crisis in China. Concerns about the financial strength of property giant Evergrande, which is struggling under crippling debts of £220billion, have sent shockwaves through China’s property sector. 

Sinking feeling: UK lenders are the largest creditors to China, with around £187billion of loans tied up in the country at the end of June

Two of the biggest international banks in China, HSBC and Standard Chartered, are British and listed in London. 

The global financial system has become increasingly exposed to Beijing as its growth has exploded. 

China’s rebound from the pandemic was swifter than in the West. Covid first emerged in the city of Wuhan, which went into lockdown in January 2020. But China’s recovery has stuttered recently, with weaker GDP growth and faster inflation than many expected. 

The spotlight has been on the country’s embattled property developers for several weeks after debt-stricken Evergrande Real Estate began teetering on the brink of collapse. Concerns have been mounting that if Evergrande, which owns properties in 280 cities, fails it could drag the property market with it. 

By mid-2021, international banks had around £705bn in exposure to China, the Bank for International Settlements said. The UK could have an additional £29billion tied up in China, mostly through other debt deals. 

The US had around £101billion by the end of June, while Japan had £72billion.

Santander warning

Supply chain chaos and disruption in the jobs market caused by the Covid pandemic could weigh on Britain’s recovery, Santander has warned. 

But climbing inflation, and the potential knock-on rise in interest rates, will affect how much banks earn, the lender added. Banks generally tend to make more money when interest rates rise, as they can charge higher rates to borrowers while hiking them gradually for savers. The lender raked in profits of £1.4billion between January and September, up from £299m the same time last year, thanks to the pandemic rebound. 

£4billion saving for lenders

Banks are set to save £4billion over five years from a cut to the banking surcharge in 2023. 

The 8 per cent tax was cut to 3 per cent by Rishi Sunak to ‘maintain the competitiveness of our financial services’, he said. It coincides with a hike in corporation tax from 19 per cent to 25 per cent. 

Banks currently pay 27 per cent tax on profits, of which 19 per cent is corporation tax and 8 per cent the surcharge. Their overall corporation tax bill would have surged to 33 per cent in 2023 had the surcharge not been reduced. 

Instead, they will pay 28 per cent – more than they currently do but less than they would have done had the surcharge stayed at 8 per cent. 

The move will save the banks £220m next year, £830m in 2023-24, £975m in 2024-25, £995m in 2025-26 and £1bn in 2026-27, Budget documents state. The financial sector has been lobbying hard for a cut to the tax and Sunak had announced plans to review it. 

He told Parliament: ‘The overall rate of corporation tax on banks will in 2023 increase from 27 per cent to 28 per cent, and will remain higher than the rates paid by other companies.’