Cracks are surfacing within the Chinese banking system, driven by years of lending to the troubled real estate sector, according to reports in Taiwan. A major Taiwan newspaper with anti-Beijing leanings is reporting that nearly 40 banks have disappeared in recent days, merging with larger institutions, and that as many as 3,800 banks are in varying levels of trouble.
Bankruptcies continue to happen. Amid increasing international reporting, earlier this month, Jiangxi Bank of China went under with rioting depositors pounding on the doors, further exacerbating the scope of the crisis. The country is home to the world’s largest banking sector by total assets, while China’s “big four” banks are also the largest four banks globally.
According to other sources, the 3,800 troubled institutions have RMB55 trillion (US$7.5 trillion) in assets, accounting for 13 percent of the banking assets although 13 percent is not enough to constitute a meltdown. Despite their numbers, they are mostly small lending institutions. Nonetheless, long mismanaged, they have accrued significant amounts of bad loans. In recent years, some have revealed that they have an average bad loan ratio of nearly 40 percent, though most concur it is an underestimate.
Although banks have used asset management companies to offload toxic loans, the National Financial Regulatory Administration has begun to go after them, imposing fines and increasing oversight.
The PBOC reported that risks concerns only a portion of the small and medium-sized financial institutions operating in rural areas. Large banks received good ratings, the PBOC said, indicating the stability of the economic system.
Other sources are sanguine, with one respected Hong Kong-based economist arguing that China is operating the proverbial Goldilocks economy, running neither too hot nor too cold. Nonetheless, the Chinese real estate industry continues to be in a crisis with the government refusing to bail it out, preferring to hold developers’ feet to the fire to wring out past excesses. The People’s Bank of China cut rates to prop up the slowing economy, surging debt, and weak consumer and business sentiment.
The scale and the speed of the disappearance of Chinese banks, especially before the Communist Party’s Third Plenum, which ended on July 18, is unprecedented although there was no mention of it during the four-day conclave. Nearly 40 banks have gone under or been merged with larger banks in the week before June 24, according to reports. Overall, China’s sluggish economy combined with bankruptcies of large property companies and a weakening stock market has fueled fears of a major financial crisis reminiscent of 2008.
Kyle Bass, chief investment officer of the Dallas, Texas asset management firm Hayman Capital, wrote on X on July 9 that “China’s banking system is collapsing.” The economy, he noted, “has 340 percent of its GDP in banking system assets (US has 1X GDP). Over a third of said assets are lent to the Chinese and HK real estate sector…experiencing its own crisis (down 30-50 percent). China’s entire banking system is insolvent,” he added.
“The sector is in a mess and the news reports are true,” a PRC banker visiting Taipei told Asia Sentinel, corroborating the news reports. Another, however, said hedge fund managers can only sit back and watch, for there is no way they can capitalize on profit opportunities.’
“It is impossible to profit from China’s banking crisis due to the strict currency controls imposed by the government,” a Taiwanese fund manager told Asia Sentinel.
The resolutely anti-China Liberty Times reported that nearly 3,000 Chinese banks are “technically bankrupt.” Bearing the brunt of the crisis are the smaller banks that are currently facing a “savings and loans” crisis, the paper reported. Since 2019, several Chinese banks have gone down under, with “the situation being most complex at smaller agricultural banks.”
Based on research of 27 local banks, as of the end of 2023, bad loans to the real estate sector have grown by nearly 30 percent compared to 2022, the Liberty Times said, quoting foreign research reports. Since the 2021 collapse of Chinese real estate companies such as Evergrande, Country Garden, Sino Ocean Group, SOHO China, Chinese banks have come under severe pressure. Evergrande alone had ties to nearly 180 Chinese banks, with several of them having faced bank runs in the aftermath of its bankruptcy, the report said.
In response to the real estate crisis, the Chinese government has implemented several measures aimed at kickstarting the housing market. For first-time buyers, down payment thresholds have been lowered, mortgage interest rates reduced, and the criteria to qualify as a first-time buyer have been relaxed. Meanwhile, existing mortgage interest rates for millions of homeowners have been cut, and a novel policy allows for the rollover of loans to the next generation, helping target the aging demographic.
Despite these interventions, the loan support of RMB469 billion by the end of March is considered small against the size of the crisis. The government’s actions have yet to provide a sustainable solution to the underlying issues plaguing the sector, leaving the future of China’s real estate market uncertain.
In addition, due to the bankruptcy of high-profile real estate developers, the public has lost trust in banks, according to reports, triggering bank runs in various cities. Analysts warn that the growing number of bad loans at Chinese banks remains a ticking time bomb with severe consequences for China and the world once all of it unravels.
Meanwhile, as the situation worsens and public confidence drops further, it could lead to bigger and more frequent bank runs. The government is likely to further push for mergers among banks to solve the problem because Beijing lacks a proper mechanism for banks to leave the market.
While the proponents of mergers believe fewer smaller banks mean it would be easier to manage, some argue that it would only lead to bigger banks with larger amounts of bad loans. It seems at the moment, there is no end in sight for China’s banking problems.
