China’s banking sector is currently facing a full crisis, as in just one week 40 banks went under and have been absorbed into larger financial institutions. The Jiangxi Bank of China also went under, further escalating the crisis.
In addition, China’s smaller banks and financial institutions are currently struggling with bad loans and exposure to the ongoing poverty crisis.
The scope of the problem is represented by 3.800 such troubled institutions that exist, having USD 7.5 trillion (CNY 55 trillion) in assets – 13% of the total banking system – and have long been mismanaged, accruing vast amounts of bad loans. At the same time, many have lent to real estate developers and local governments, gaining exposure to China’s property crisis. In recent years, some also have revealed that 40% of their books are made up of non-performing loans.
Mid-tier lender Bank of Jiujiang recently revealed that its profits might fall by 30% due to poorly performing loans and services. This represents a rare disclosure highlighting the severity of the situation, while the authorities have been pushing for more transparency and the true extent of the bad debt problem is still emerging. The four state AMCs created to manage bad debt are also struggling, with one needing a USD 6.6 billion bailout in 2021. Of the 40 institutions that went down recently, 36 were in the Liaoning province and incorporated into a new lender, called Liaoning Rural Commercial Bank.
China’s property sector is currently in a deep recession, which represents the root cause of the problem. Overextended real-estate developers and local governments also defaulted on loans, which developed financial instability. Property prices and construction projects have also stalled, further straining the overall financial system.
Banks and financial institutions also have been using asset-management companies in order to offload toxic loans, which created a façade of stability. These AMCs also buy loans but avoid taking on the credit risks, which leads to a buildup of hidden bad debts. The National Administration of Financial Regulation (NAFR) has also been cracking down on these practices, issuing fines and increasing oversight.
This process is expected to probably pick up pace, with the Chinese economy in an extended and pretend state. In addition, the slower development of the Chinese economy will exacerbate their banking problems as well. In addition, this will likely end massive liquidity injections, stimulation of the economy, and investors flowing to hard assets.
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