Singapore, Aug 21 (ANI): Banks in Asia's trade-dependent developed markets will face the most pressure on their credit profiles in the event of a sharp slowdown in the Chinese economy, according to a new report by Fitch Ratings.

Banks in these markets are among those with the strongest underwriting standards and risk controls in the region, but the downturn in economic conditions will test asset quality and add to their existing profitability challenges.

Fitch Ratings' hypothetical scenario models the economic impact of a sharp Chinese economic slowdown sparked by the United States imposing additional tariffs of 25 per cent on about 300 billion dollars of Chinese imports.

The tariff impact is sharply amplified by a separate investment shock involving a substantial retrenchment in investment activity against the backdrop of corporates' need to ease balance-sheet pressure and preserve liquidity amid weaker demand.

Chinese GDP growth will trough at 3.4 per cent in 2020 as compared to a base case of 5.9 per cent before recovering to 4.2 per cent in 2021, said the report.

A severe slowdown in China will affect Asia Pacific banks through three main channels --- direct losses on mainland exposure, broader stress from a weaker regional economic environment and market risks from a negative shift in global investor sentiment.

Outside of mainland China, Hong Kong banks have the most direct exposure to a Chinese slowdown with claims on the mainland accounting for 30 per cent of Hong Kong's system assets at end-2018.

Singaporean banks also have significant direct exposure. Hong Kong and Singapore -- along with South Korea and Taiwan -- will also be hit the hardest through macroeconomic knock-on effects, given their close trade links with mainland China.

A severe China slowdown could also undermine housing market sentiment and exacerbate home price corrections in markets where affordability is most stretched, most notably Hong Kong and Australia.

The region's emerging markets will generally be most exposed to a shift in investor sentiment away from risky assets and markets. Most Asian economies have low external financing requirements relative to their international reserves, giving them a buffer against market pressures.

Banks in Sri Lanka and Indonesia also have a significant proportion of outstanding loans denominated in foreign currency, which could expose them to asset quality risks from currency weakness. (ANI)