Are risks of a Chinese credit crisis growing?

By Wei Gu

HONG KONG (Reuters) - China's banks seem to have dodged a bullet in the still-unraveling U.S. subprime mortgage crisis.

Chinese lenders accumulated large amounts of that bad debt. But bankers have assured investors they are within manageable levels that won't greatly affect their profits, fattened by a domestic economy that is growing at double-digit rates.

But that doesn't mean China will be able to avert a credit crunch of its own making. In fact, risks are growing for a credit crisis with Chinese characteristics.

A crisis like that could rock global markets, because China has been one of the few bright spots in the world economy.

With memories still fresh of Beijing having injected more than $260 billion into its banks while shifting bad loans off their books, another huge bailout may become necessary if loose lending practices aren't halted.

What could trigger such a turnaround in China's credit market? A sudden sharp slowing of the Chinese economy.

That's not as far-fetched as it might seem. Weaker overseas demand and the bursting of an asset bubble in China could force small exporters and property developers to default in droves.

Sudden deflation of a bubble can lead to fast deteriorating asset quality, cascading in a chain reaction through the financial system, as has been seen in the United States.