NewsChina's banking turmoil: 40 banks vanish as crisis deepens

China's banking turmoil: 40 banks vanish as crisis deepens

The Chinese banking sector may be at risk.
The Chinese banking sector may be at risk.
Images source: © Getty Images | Bloomberg

8:33 AM EDT, July 10, 2024

The Chinese banking sector is facing a severe crisis. In just one week, 40 banks disappeared, and the collapse of Jiangxi Bank has further deepened the sector's problems. Experts warn that the situation could have severe consequences for the global economy.

Reports from China indicate the collapse of one of the banks. The portal renminbao.com published a report from outside the headquarters of Jiangxi Bank, which concerned clients stormed over bankruptcy rumors. The bank had previously informed that its profits could drop by 30% due to customers' loan repayment issues.

China's growing problems with banks

The Economist described the situation in the Chinese banking market. It was noted that approximately 3,800 banking institutions were threatened in China. Their assets are 55 trillion yuan ($7.5 trillion), representing 13% of the country's banking system. The magazine emphasizes that these banks have long been poorly managed and have accumulated vast amounts of bad loans.

The report states that many of them lent money to developers and local governments, exposing themselves to the impacts of the real estate market crisis. The authors note that in recent years, some banks have revealed that 40% of their portfolios are non-performing loans.

Disappearing banks and attempts to rescue the sector

The rare disclosure of a bank's problems may underscore the seriousness of the situation. A similar mechanism was observed with developer companies. Little was heard about the giants' problems until the authorities eventually confirmed an issue affecting the entire industry.

"The Economist" points out that China's primary strategy in dealing with small, weak banks is to "absorb" them. Of the 40 recently disappeared institutions, 36 were located in Liaoning province and were taken over by a lender named Liaoning Rural Commercial Bank.

Cryptocurrency market analyst Sigma G also examined the situation in China's banking sector. He points out that the leading cause of the problems is the deep recession in China's real estate sector. Over-indebted developers and local governments fail to repay loans, leading to financial instability. Property prices have plummeted, and construction projects have been halted, further burdening the economic system.

The author also highlights the issue of hidden bad debts. Banks have used asset management companies (AMCs) to offload toxic loans, creating an illusion of stability. However, a new banking regulator, the National Financial Regulatory Administration (NAFR), has begun cracking down on these practices by imposing fines and increasing oversight.

Outlook for the Chinese economy

The author predicts that the Chinese economy is entering a prolonged and feigned growth phase. "Years of credit-fueled growth has finally run its course, and the result will be. lower growth for China and a negative impact on the global economy. Slower growth of the Chinese economy will, in turn, exacerbate their banking problems too," warns Sina_21st.

The expert forecasts that slower growth in China's economy will exacerbate banking problems. He believes this situation will most likely end with massive liquidity injections, economic stimulation, and investors fleeing towards hard assets.

S&P experts quoted by "The Economist" estimate that repairing China's banking system could take up to a decade. However, official data may still not reflect the scale of the problem. The 2023 report of the People's Bank of China states that 3,655 banks, whose assets accounted for 98.28% of all assets deposited in Chinese banks, are safe. The Chinese bank also confirmed that the risk concerns a portion of small and medium-sized financial institutions operating in rural areas. According to the document, large banks received good ratings, indicating the stability of the economic system.

The clock is ticking, problems may deepen

Why do small banks have such big problems? Many Chinese cities and even entire regions are drowning in debt. The liabilities were so high that local government representatives sent envoys to Beijing in the spring. They are negotiating terms for repaying billions in loans. Unpaid debts are increasingly weighing on regional economies, threatening national economic growth.

The debts that Chinese cities are drowning in are primarily the consequences of the real estate crisis and the effects of the pandemic. Over the past decade, many construction projects were financed with debt. Infrastructure development was supposed to drive local growth, but following the crisis caused by the COVID-19 pandemic, local governments lost the ability to continue investing. Meanwhile, they still have to repay old debts.

Goldman Sachs estimates the debts of the most important Chinese regions at $13 billion. Some of these liabilities are public bonds, and defaulting on them could damage the entire economy.

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