The Chinese financial crisis is worsening. In this latest phase, Chinese banks, anticipating huge loan losses, have taken dramatic steps to bolster their loan loss reserves, tapping into Chinese bond markets for about 30% more funds year-on-year. last. The problems of the banks are hardly a surprise. They’re actually just another step in the metastasis crisis that began more than a year ago when huge property developer Evergrande announced it could no longer sustain some $300 billion in liabilities. . At the time, Beijing clearly did not understand what was about to happen and refused to act quickly or completely enough to stop the series of failures that have since characterized Chinese finance. These failures and the crisis in general will continue to spread until Beijing acts more decisively.
What China is going through is a textual illustration of the unfolding of a financial crisis. Failures in one place have led to failures elsewhere, and the associated fears and lack of trust render the system unable to function effectively or sustain economic growth.
The spread of unrest began when Evergrande announced its failure. Immediately, any business or financial institution that relied on Evergrande’s ability to meet its obligations became vulnerable to loss. And, in the nature of finance, anyone who relied on these others also immediately became vulnerable. It didn’t matter if the vulnerability was direct to Evergrande or secondary or even tertiary, all potential lenders and business partners had questions about everyone’s viability, questions that become even more intense as other developers followed Evergrande. with similar announcements.
This mistrust of others spread further to Chinese mortgage lenders when Chinese borrowers, fearing that these developers would never complete contracted projects, threatened to stop paying their mortgages. As most banks were involved, this threat caused Chinese depositors to worry about the safety of their funds, a fear that became particularly acute when the Bank of China unilaterally restricted withdrawals.
The financial problems had obvious economic effects. Weakness is already evident in China’s economy which, despite increased government infrastructure spending, threatens to fall well short of the already cut real growth target of 5.5% this year. Many attribute the economic shortfall to the severe shutdowns and quarantines imposed by Beijing in response to the Covid outbreaks. No doubt these played a role. But the financial crisis, though downplayed by Beijing and Western media, has had a profound effect. When people fear for the safety of their bank deposits, they slow down or stop spending. When lenders fear the viability of companies and individual borrowers, they stop providing capital to otherwise promising projects. When people involved in business arrangements fear the viability of their associates, projects come to a halt. As is becoming increasingly evident, all of this is slowing down the wheels of trade and development.
The fate of Chinese steel is a perfect illustration of this. Because property developers halted their projects and because of a lack of credit, some 29% of the industry announced that it was on the verge of bankruptcy. This is a sharp drop from last year, when China’s steel industry profitably sold billions of tons, or about half of global production, in fact. According to Li Ganpo, founder and chairman of the Hebei Jingye Steel Group, “The whole industry is losing money, and I don’t see a turnaround at the moment.” And these problems spread naturally. Iron ore prices have fallen 36% since March. Steel is just one example. China will continue to see these kinds of shortfalls until Beijing acts to stop the spread of failure.
Beijing could have avoided much of this economic pain if it had acted on Evergrande’s announcement. Authorities might have lent directly to short-circuit what has become an inexorable spread, not to failing developers but to other actors in the financial system to mitigate their vulnerability to developer failures. This would have helped restore confidence and ensured that loans would continue to keep the wheels of trade turning. Alternatively or additionally, the People’s Bank of China (PBOC) could have increased the flow of loanable funds from the system so that private lenders and public banks could afford to lend more aggressively and also have sufficient financial cushion. to reassure customers’ fears. on the security of their deposits. But Beijing failed to act and so financial failures and their fears progressed, textbook fashion, throughout the Chinese financial system. This progression, with its adverse effects on the economy, promises to become increasingly serious unless Beijing implements such policies.
Unfortunately, there are few signs that Beijing has fully awakened to this need. So far, the Politburo, China’s top decision-making body, has insisted that local and provincial governments take the lead in dealing with financial strains. Passing the buck in this way suggests that Chinese leaders have studied Washington more thoroughly than previously thought. Cynical joking aside, this shifting of responsibility and inaction does the Chinese economy no good. At best, local and provincial governments would have been unable to cope with the scale demanded by the financial crisis. But after years of Beijing forcing local and provincial governments to fund infrastructure projects ordered by central planners, these government entities lack the financial resources to deal with local affairs, let alone the needs of the financial system. national. Beijing is the only actor capable of fulfilling this role, and so far it has refused to act beyond a few marginal interest rate cuts.