It’s almost 8,000 kilometers from the German financial capital Frankfurt to Beijing, but the two cities are closer than you might think. The current economic crisis in the East, which has rocked global stock markets over the last fortnight, could prove expensive for Germany’s banks.
On the face of it, the Chinese financial market seems relatively isolated, but the latest figures show that Europe has become increasingly exposed over the past few years. Britain’s financial sector has more outstanding loans in the world’s second-largest economy than any other country, including the United States, but Germany’s financial sector has significant skin in the game as well.
German banks have lent around €33 billion, or $37 billion, to China as of the first quarter of this year. If we include Hong Kong as a financial center, loans from German banks come to almost €48 billion.
Martin Hellmich, a professor of risk management at the Frankfurt School of Finance, said that a further deterioration in the economic situation in China will not cause German banks to get into financial difficulties, but he did warn that “significant write-downs might be needed on some loans.”
For some banks that are already struggling to make a profit, this could have a visible impact on their return on equity, a measure of profitability, Mr. Hellmich said.
Some banks may also have to think twice about plans to expand their lending operations in the Asian powerhouse, which until the recent upheavals had been viewed as something of a holy grail for growth-hungry companies and banks.
About half of German loans have gone to other banks in China, which themselves are now having to cope with an increasing number of bad loans on the domestic market.