China's Banking Turmoil: 40 Banks Vanish

The Chinese banking sector is facing a severe crisis. In just one week, 40 banks disappeared. 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.

Deepening Burdens

Approximately 3,800 banking institutions are currently threatened in China. Their assets are worth a combined 7.5 trillion USD. Most of the threat comes from improper management and a high volume of bad loans. The situation looks reminiscent of the Savings and Loans crisis that happened in the U.S. during the 80s and early 90s in which over 2,900 banks failed.

One of the most painful aspects of the excessive loans is that many of them were to property developers and local governments. This means that they are heavily exposed to the real estate market crisis which has been playing out. The dissemination of this information has also led to people anticipating the collapse of their banks to rush in and pull out their deposits. This could be a dangerous catalyst that hastens the demise of the small banks.

Too Late? Regulations Add to the Pain

The current panic is very similar to what happened in the real estate market. The problems were ignored until they reached a critical point. China’s strategy in this situation is typically allowing larger banks to consume large amounts of smaller banks, so one might expect to see that play out again on a potentially large scale.

China’s financial regulator has also been tightening the screws on the shady practice of obfuscating bad debts. Some banks have simply been reshuffling their toxic loans to show a veneer of stability and responsibility. As these get exposed, fined and prevented, it leaves the small banks with very few tools at their disposal.

Outlook for the Chinese Economy

The forecast for China's economy is bleak. Years of credit-fuelled growth have run their course, leading to a prolonged phase of feigned growth. As the Chinese economy slows, banking problems are expected to worsen. Experts predict massive liquidity injections, economic stimulation efforts, and a flight 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. The 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, many 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.