Bundesbank: German banks are vulnerable to China shocks

Frankfurt — An economic crisis in China would knock about 1.5% off German economic growth and is likely to hurt its banks, but an outright decoupling from the world’s second-largest economy would be much worse, the Bundesbank said on Wednesday.

According to its simulations, real German GDP would be 0.7% lower in the first year of the crisis and just under 1% in the second year as a result of lower exports to China, which is Germany’s fourth-largest market.

China is struggling with distress in the housing market, local government debt and weakening global demand, adding to fractious trade and geopolitical relations with the West.

The Bundesbank estimated a full-blown economic crisis in China — of the kind typically seen after times of excessive credit growth — would have “sizeable but manageable” spillover effects on Germany.

In addition, German banks would face “significant risks”, the Bundesbank said.

While their direct exposure to China is “negligible” at about €35bn, the indirect one — via German companies that operate in China — is a much larger €220bn, it calculated. This is equal to 7% of all risky assets held by German banks and 42% of their core capital.

But the German central bank warned an “abrupt decoupling” from China would be “neither realistic nor desirable” and even an “orderly withdrawal ... would entail considerable losses”.

German companies are starting to review their reliance on China amid concern over how any Western sanctions or a future conflict over Taiwan might disrupt trade.

These decoupling scenarios would not only hurt exporters but, much more significantly, jeopardise key imports such as rare earths, laptops and solar panel.

Germany derives 13% of its imported goods from China, making it its most important supplier.

Instead, the Bundesbank advocated strengthening trade agreements that would allow German companies to diversify away from China and welcomed the government's recent strategy as going “in the right direction”.

Reuters