The slowing Chinese growth and financial increasing bad debts of Chinese banks is an alarm for the nations worldwide. Combined with the previous leveraged expansion, china now has a number of secret that suffer from the twin ailments of over-capacity and high leverage.
Rajan has raised concerns over bad loans of Chinese banks and weaknesses in the shadow banking system of world’s second largest economy. “Bad loans in the banking system are likely to grow over the current levels-stressed loans are estimated to be around 5.5% of the bank loan book today. In addition, there may be serious weaknesses in the shadow banking system, which could feed back to banks”
India is safe and doesn’t have much borrowing from Chinese banks, these becomes expensive if Chinese banks turn inward. Moreover, financial market losses in china can heighten the risk that the other industrial countries will charge more for investing.
China surpassed the US as the largest trading nation in 2013, Rajan said the slowdown in Chinese policymakers would mitigate the potential downside. South Asian countries have to take steps to limit the impact of external uncertainty such as next rate hike by US Federal Reserve , a possibly sharp downturn in the Chinese economy, the proposal exit of Britain from the European Union and volatile capital flows.
Indian Policy Safeguarding Economy
Stating that Indian policymakers, including RBI, had adopted several step to mitigate the impact of external shocks, Rajan listed the government’s reforms and fiscal consolidation path along with RBI’s new monetary policy framework as steps that would safeguard the economy.
He said RBI has been careful about foreign currency borrowings and holdings of Indian debt by foreign investors.
He added that the central bank had been building foreign exchange reserves and the RBI’s regular intervention had ensured that despite a current account deficit, the Indian rupee has remained relatively stable. “We have about $360 billion (forex reserves), plus forward positions to offset possible forward liabilities. We also see merit in pooling reserves, and have a contingent reserve agreement with BRICS countries, and a currency swap arrangement with SAARC countries,” Rajan said.