The Chinese banking sector is grappling with a severe crisis as 40 banks have vanished within a single week. The collapse of Jiangxi Bank has exacerbated the sector’s woes, leading experts to warn of potential severe repercussions for the global economy.
Deepening Burdens
Approximately 3,800 banking institutions in China are currently at risk, with their combined assets valued at a staggering 7.5 trillion USD. The primary threats stem from improper management and a high volume of bad loans, drawing parallels to the Savings and Loans crisis in the U.S. during the 1980s and early 90s, where over 2,900 banks failed.
A significant portion of these excessive loans was directed towards property developers and local governments, making the banks highly vulnerable to the ongoing real estate market crisis. The spread of this information has led to depositors rushing to withdraw their savings, potentially accelerating the collapse of smaller banks.
Too Late? Regulations Add to the Pain
The current panic mirrors the real estate market’s issues, which were ignored until they reached a critical point. China’s typical response involves allowing larger banks to absorb smaller ones, a trend that might continue on a large scale.
China’s financial regulator has also tightened its grip on the dubious practice of concealing bad debts. Some banks have been reshuffling their toxic loans to project an illusion of stability. As these practices are exposed, fined, and prevented, small banks find themselves with limited options.
Outlook for the Chinese Economy
The forecast for China’s economy appears bleak. Years of credit-fuelled growth have reached their limit, leading to a prolonged phase of feigned prosperity. As the Chinese economy slows down, banking issues are expected to worsen. Experts predict massive liquidity injections, economic stimulation efforts, and a shift of investors towards hard assets.
S&P experts estimate that repairing China’s banking system could take up to a decade. Despite official reassurances, the scale of the problem may be understated. Small banks in China face enormous challenges. Many cities and regions are drowning in debt, with local government representatives seeking repayment terms from Beijing. These debts, a legacy of the real estate crisis and the pandemic, are weighing heavily on regional economies and threatening national growth.
Over the past decade, numerous construction projects were financed with debt. The COVID-19 pandemic disrupted these plans, leaving local governments unable to continue investing while still burdened with old debts. Goldman Sachs estimates the debts of the most important Chinese regions at $13 billion, with potential defaults posing a significant threat to the entire economy.
The turmoil in China’s banking sector is a stark reminder of the fragility that can arise from prolonged credit-fuelled growth and poor financial management. With small banks teetering on the brink and larger institutions stepping in, the future of China’s financial stability hangs in the balance. The global economy must brace for potential impacts, as the reverberations of this crisis could be far-reaching.
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