Shanghai financial centre

Blog published on 11th September 2023 and article as published on 16th August 2023 in the Daily Express

China’s potential economic meltdown, with its £2.4trillion banking system under threat, has “definite spillover potential” for the UK, a banking expert has warned.

Consultant Bob Lyddon was speaking after the UK stock market slumped yesterday as a result of concerns about the Chinese economy.

London’s FTSE 100 plunged by around 1.7 percent during the day, reaching lows of more than a month as all but a handful stocks on the blue-chip index saw losses.

In particular there are worries about real estate company Country Garden Real Estate Group, which last week warned it was anticipating a net loss of between £4.88billion to £6billion, compared with earnings of £210million in the first half of 2022.

Harvey Jones yesterday warned of the threat of so-called “contagion”, whereby market jitters in one market spread to others.

Mr Lyddon, founder of Lyddon Consulting Services Ltd, told “This Chinese company has about $200 billion [£157billion] of debt and it missed a debt payment. It is a massive real estate concern and the second one, after Evergrande, to get into difficulty.”

Missing a payment did not mean the company was is in default and the lenders could still repossess and try and sell its properties, Mr Lyddon stressed, adding: “It has 30 days to find the money and cure its failure to pay.”

However, he added: “It is not a good sign. China appears to be in considerable trouble, the banks will not want to repossess all those properties and try to sell them all together at this time in a falling market. That is the sort of thing that causes a rout.”

He continued: “It would be nice to know how much HSBC is exposed, although it would not be within the ring-fenced UK bank.

“The contagion could be on the value of real estate worldwide, and that would not be nice for the UK, and on Chinese banks who are very large and whose financial strength is questionable given state control and accounting standards.

“Which UK banks are heavily exposed to Chinese banks? We don’t know, but HSBC and Standard Chartered certainly and probably Barclays and NatWest as well. Lloyds and Santander less likely. So there is a definite spillover potential.”

Coming into this year, the expectation was that China’s economy would grow enough after the government removed anti-COVID restrictions to boost a global economy weakened by high inflation.

However, China’s recovery has faltered so much that it unexpectedly cut a key interest rate on Tuesday and skipped a report on how many of its younger workers were unemployed.