Letters of credit (L/Cs) will help insulate Singapore's banking sector from economic shocks from China according to Fitch Ratings.

This counters an argument put forward this month by Swiss billionaire investor, Felix Zulauf, that leading Singaporean banks will see huge capital outflows if the Chinese economy suffers a hard landing, which he expects this year.

Shock absorbers

Fitch Ratings believes that large Singaporean banks such as DBS can withstand an economic shock from China, to which it has become increasingly exposed to over recent years.

The ratings agency says the bank's credit risk from its increased exposure to China is sufficiently mitigated because, "first, a large part of the increase came from short-term, self-liquidating trade loans, which are traditionally safer and are mostly backed by L/Cs from systemically important Chinese banks."

"Second, DBS says it targets better-quality Chinese and international corporates," Fitch adds.

Chinese exposure

DBS has the largest lending exposure to mainland China in Singapore's banking sector.

The majority of Singaporean banks' Chinese exposure is to Hong Kong, while their mainland China exposure is predominately trade finance related.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.