photo: forbes.com
China’s declining banking industry is causing concern that it may have an adverse impact on the overall economy, which could trigger a ripple effect causing political and social unrest.
The Chinese banking sector has increased lending to the infrastructure and real estate sectors over the past five years to facilitate economic growth. In 2008, the Chinese banking sector was worth around $10 trillion. Today, because of the credit boom, it is worth $24 to $25 trillion.
“That incremental increase of $14 to $15 trillion is the equivalent of the entire size of the United States commercial banking sector, which took more than a century to build. So that means China will have replicated the entire US system in the span of half a decade,” said Charlene Chu, an analyst from Autonomous Research, a company which aims to be the leading independent research provider on financial companies in Europe and the US.
chenggong
photo projectavalon.net
New Mall in Dongguan
photo wikipedia
The rate of lending is relatively quicker than the repayment rate. Coupled with rising interest rate on the loans, there is a risk of borrowers defaulting on their loans. The economy is not able to fully absorb the money that is circulating quickly. As a result, more “ghost cities” and abandoned properties such as the city of Chenggong in Yunnan and the New South China Mall in Dongguan have cropped up.
This rise in lending has been linked to the rise of shadow banking. The shadow banking system facilitates lending in the financial system, but is not subjected to governmental inspections. They do not adhere to the deposit quota set by regulations to ensure that they remain self-sufficient and financially sound during uncertain times. The lack of scrutiny means that they run higher risks and often lend under radar compared to regulated institutions. This makes it harder to gauge the state of the economy, as these transactions are often hard to trace.
However, fear about the Chinese economy worsening as a result of the precarious banking sector might be premature. The Chinese central bank has recently taken action to curb lending and withdrew about $7.9 billion from the money markets.
Compared to other emerging markets, China has a more stable situation. Unlike other open economies whereby the markets come to equilibrium on its own terms, China is unique as it does not rely on foreign funding, has a closed capital account and the state has strong influence over lenders and borrowers. Instead of a harsh financial crash, China might experience a banking crisis that is similar to Japan, where the crisis develops into very slow growth and deflation over a long period of time.
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