Linn Maung
China’s banking industry is going through a major crisis. In a span of just seven days, 40 banks have vanished, and the downfall of Jiangxi Bank has added to the industry’s woes. Experts are cautioning that this situation could have serious implications for the worldwide economy.
News from China points to the failure of a bank. The website renminbao.com posted a report from the front of Jiangxi Bank’s headquarters, which was besieged by worried customers due to rumoursof bankruptcy. The bank had earlier warned that its profits might decrease by 30% because of issues with loan repayments from customers.”
The Economist talked about what’s happening with banks in China. They said around 3,800 banks in China are in danger. These banks have assets worth 55 trillion yuan (about $7.5 trillion), which is 13% of all the money in China’s banks. The article pointed out that these banks haven’t been run well for a long time and have a lot of bad loans.
The report indicates that a significant number of these banks have provided loans to developers and local governments, thereby making themselves vulnerable to the effects of the real estate market downturn. It’s been highlighted by the authors that some banks have disclosed in recent years that non-performing loans make up 40% of their portfolios.
The infrequent revelation of a bank’s difficulties could highlight the gravity of the situation. A comparable pattern was seen with property development firms. The issues faced by these major companies were largely unheard of until the authorities finally acknowledged a problem impacting the whole sector.
“The Economist” points out that China’s primary strategy in handling small, struggling banks is to “absorb them”. Out of the 40 banks that recently vanished, 36 were in Liaoning province and got taken over by a bank called Liaoning Rural Commercial Bank.
Crypto currency market observer Sigma G has also scrutinized the circumstances in China’s banking industry. He identifies the primary source of the issues as the severe downturn in China’s property market. Developers and local governments, burdened with excessive debt, are unable to repay their loans, resulting in financial turbulence. The steepfall in property values and the cessation of construction projects have added more strain to the economic structure.
The writer also brings attention to the problem of concealed non-performing loans. Banks have been employing asset management companies (AMCs) to shed their bad loans, thereby projecting a facade of stability. However, a fresh banking watchdog, the National Financial Regulatory Administration (NAFR), has started to clamp down on these methods by levying penalties and enhancing supervision.
The author anticipates that the Chinese economy is on the brink of a sustained and disguised growth phase. Sina_21st cautions, “The era of growth driven by credit has reached its limit, and the outcome will be a slowdown in China’s growth and a detrimental effect on the global economy. The deceleration of China’s economy will, in turn, intensify their banking issues.The specialist predicts that a slowdown in China’s economic growth will aggravate the banking sector’s problems. He opines that this situation will likely culminate in substantial injections of liquidity, economic stimulus, and investors seeking refuge in tangible assets.
Experts from S&P, as mentioned in ‘The Economist’, think it could take up to 10 years to fix China’s banking system. But the official numbers might not show how big the problem really is. The People’s Bank of China’s 2023 report says that 3,655 banks, which hold 98.28% of all the money in Chinese banks, are safe. The Chinese bank also said that the risk is mostly with small and medium-sized banks in rural areas. The report says that big banks got good ratings, which means the economy is stable.
What’s causing these massive issues for small banks? Numerous cities and even whole regions in China are sinking under a sea of debt. The debt levels have escalated to such an extent that representatives from local governments dispatched delegates to Beijing in the spring season. They are in talks to figure out how to pay back billions in loans. The burden of unsettled debts is progressively putting pressure on regional economies, posing a risk to the growth of the national economy.
Chinese cities are deep in debt, mainly because of the real estate crisis and the pandemic. In the last 10 years, a lot of building projects were paid for with borrowed money. These projects were meant to help local areas grow, but after the COVID-19 crisis, local governments couldn’t keep investing. At the same time, they still have to pay back the money they owe.
Goldman Sachs has calculated the debt of China’s key regions to be around $13 billion. A portion of these obligations are in the form of public bonds, and any failure to honour these could have detrimental effects on the entire economy.
