Hard landing in China remains a key threat for Asian banks in 2016

Japan, Singapore, Hong Kong, Korea and Taiwan are most exposed.

A more severe slowdown or hard landing in China would add significantly to the challenges and rising risks for the banks within China and across the rest of APAC. Fitch’s base case is for decelerating growth to be an ongoing theme.

"We forecast China’s GDP growth at 6.3% in 2016, and to decelerate further to 6.0% in 2017. This will continue to weigh on regional growth prospects. The rebalancing will lead ultimately to a better-balanced Chinese economic growth path, with expansion at a more sustainable rate. But the risks built up since 2008 associated with the credit-supporting surplus capacity have yet to fully crystallise, and will weigh on the financial system over the short to medium term. This is playing out at the same time as the pressures from financial sector liberalisation," says Fitch.

Here's more from Fitch Ratings:

A China hard landing scenario highlights that Asia as a region would be hit the hardest – with the open trade-related economies such as Japan, Singapore, Hong Kong, Korea and Taiwan most exposed.

These markets also have the largest direct exposure via their financial systems, raising the likelihood of some of the financial system risks in China being transmitted to regional financial centres. There would also be the risks of further weakness in commodity prices, and the potential for a weaker Chinese currency. This would expose commodity exporters – with Indonesia, Malaysia, Mongolia and Australia being the most sensitive.

A weaker Chinese yuan would be a natural consequence of these pressures, which would in turn put further pressure on other currencies in the region. This would hurt confidence across other emerging markets, all of which would compound pressures on more sensitive emerging markets and those reliant on commodity exports.