Earlier this week we looked at how the Shanghai market has remained relatively unscathed by the sub-prime meltdown, but what about individual banks' exposure? 

There is of course a risk for HK and mainland Chinese banks.  Estimates are that roughly 6-11% of Hong Kong and Chinese mainland banks assets have been reinvested into US credit, however, while this isn’t a small number in itself, most of the assets are invested in highly rated A to AAA debt, with little default risks, so little risk here.

The 'mark to market' pricing of the assets however is a bit more difficult and re-priced debt in the US will likely affect the value of these saleable portions of the portfolios.  Estimates are around 4-5% drop in value for HK banks and 2% for mainland banks.

So what does this mean longer term?  Rationally, the share performance of Chinese banks should be stunted in the near term as ‘once bitten’ investors shy away from riskier credits/equities in the market.  However, fundamentals of the financial sector remain strong, further emphasized by yesterday’s announcement by Bank of Communications of 42% rise in 1^st half profits, and the unwavering optimism of Chinese investors will likely combine to support the market despite the fact that the growing CPI that has increased every-day commodity prices by over 40% in certain cases (e.g. pork).

Underlying this entire evolving situation right now is the constant need for banks to get to grips with their risk portfolios.  In this case, the meltdown will likely be limited to markets in the US and corporates, however, if it had extended or does indeed extend into the consumer market, a real understand of overall bank credit positions would be critical for banks to maintain liquidity.

We’re not there yet, but on the way.