China's banking crisis deepens with collapse of Jiangxi Bank
The Chinese banking sector is facing a serious crisis. In just one week, 40 banks disappeared, and the collapse of Jiangxi Bank of China 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 the Jiangxi Bank, which concerned clients stormed over bankruptcy rumours. The bank had previously officially 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 noted that approximately 3,800 threatened banking institutions exist in China. Their total assets are 55 trillion yuan (approximately $10 trillion CAD), which represents 13% of the country's entire banking system. The magazine emphasizes that these banks have long been poorly managed and have accumulated vast amounts of bad loans.
"Many of them lent money to developers and local governments, exposing themselves to the impacts of the real estate market crisis," the report states. The authors note that in recent years, some banks revealed that 40% of their portfolios consist of 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 the issue affecting the entire industry.
"The Economist" points out that China's main strategy in dealing with small, weak banks is to "absorb" them. Of the 40 institutions that have recently disappeared in this way, 36 were located in Liaoning province and were taken over by another 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 phase of prolonged and slower growth. "Years of credit-driven growth have finally come to an end, and the result will be slower growth for China and a negative impact on the global economy," warns Sina_21st.
The expert forecasts that slower growth in China's economy will, in turn, exacerbate banking problems. He believes that 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. "Large banks received good ratings, indicating the financial system's stability," the document states.
The clock is ticking, problems may deepen
Why do small banks have such big problems? Many Chinese cities and even entire regions are literally drowning in debt. The liabilities are so high that local government representatives already sent envoys to Beijing in the spring. They are negotiating terms for repaying billions in loans. Unpaid debts are increasingly weighing on local 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 $18 billion CAD. Some of these liabilities are public bonds, for example. Defaulting on these could impact the entire economy.
