These are tumultuous times for the ruling Communist Party ahead of the 70th birthday bash in October to celebrate the founding of the People’s Republic of China.
During the past year, President Xi Jinping’s administration has been left grappling with rising trade tensions with the United States, a slowing economy, concerns about “hidden overseas debt” and now the embryo of a banking crisis.
Slipping between the US conflict cracks was the news in May that the Baoshang Bank, based in the Inner Mongolia autonomous region of northern China, had been bailed out by Beijing.
Two months later, the Bank of Jinzhou in Liaoning Province was rescued by one of the ‘big five’ lenders, the Industrial and Commercial Bank of China, after running into trouble.
Then, last week, it was revealed that Hengfeng Bank would receive a 30 billion yuan (US$4.3 billion) cash injection from the Shandong provincial government, the Caixin media group reported.
Non-performing loans are at the heart of the problem with the International Monetary Fund warning that China’s “small banks” need to “raise capital.”
“Financial deleveraging and reduced interconnectedness between banks and non-banks have helped contain the build-up of financial risks, but vulnerabilities remain elevated and progress on rebalancing is mixed,” the IMF said in its annual survey of China’s economy, which was released at the weekend.
Potential potholes
An earlier report by DBS, the multinational banking group in Singapore, illustrated the potential potholes.
“Given the challenging macro ahead, we ran a stress test on Chinese banks which represented 76% of total assets in China,” DBS stated in a June study.
“Under the bear-case scenario assuming GDP [gross domestic product] slowdown, benchmark rate cut, ongoing trade disputes, retail loan credit bubble, and increasing POE [privately-owned enterprise] risks, China banks’ capital shortage would be 2 trillion yuan.”
To combat such a “scenario,” the Banking and Insurance Regulatory Commission has already launched a major crackdown on loans into the depressed property sector.
High-risk assets have declined by 13.74 trillion yuan, or $1.98 trillion, in the past two years amid tighter regulation.
“China’s small and medium banks have relatively ample liquidity and their risks are under control,” the CBIRC stated in a media briefing to the official state-run Xinhua news agency in June.
But anxieties persist especially as the nation’s debt mountain continues to grow, casting a shadow over a sluggish economy.
The private sector, for example, has already been hit hard by the trade war and a lack of funding.
Buffeted by what is rapidly becoming a new economic Cold War between Beijing and Washington, many companies are short of cash and struggling.
In a move to address the situation, they are resorting to IOU payments, or commercially acceptable bills, from creditors.
“[Roughly,] $200 billion in I.O.U.s are floating around the Chinese financial system, according to government data,” The New York Times reported earlier this week.
Indeed, this credit squeeze has tightened because the leading state-owned banks are reluctant to lend to the private sector, despite incessant statements by China’s powerful State Council to loosen the purse strings.
Government debt
Another economic iceberg just below the surface is local government debt.
“The extent of off-balance-sheet borrowing among local governments isn’t known but could be as high as Chinese renminbi [yuan] 40 trillion [$5.78 trillion],” S&P Global, one of the ‘big three’ credit rating agencies, stated in a report last year. “That’s a debt iceberg with titanic credit risks.”
Most of the “hidden debt” is festering in local government financing vehicles, or LGFVs, which were set-up by state-owned companies to raise funds for massive infrastructure and development programs.
But that is not the only concern. A lack of transparency has also been highlighted in China’s overseas investment binge, including the $1 trillion Belt and Road Initiative.
At times, it has looked like a magical mystery tour, baffling the World Bank and the IMF. Or, according to critics, a diplomatic car crash waiting to happen.
“Compared with China’s dominance in world trade, its expanding role in global finance is poorly documented and understood,” a report released last month by the Kiel Institute for the World Economy pointed out.
“Over the past decades, China has exported record amounts of capital to the rest of the world. Many of these financial flows are not reported to the IMF, the BIS [the Bank for International Settlements] or the World Bank.”
A breakdown of the numbers showed that lending soared to around $5 trillion by 2018 from roughly $500 billion in 2000 which dwarfs World Bank and IMF credit lines.
“Apart from the aforementioned omissions in reporting to the Paris Club, China does not divulge data on its official flows with the OECD’s Creditor Reporting System, and it is not part of the OECD [Organisation for Economic Co-operation and Development] Export Credit Group, which provides data on long- and short-term trade credit flows,” the Kiel Institute study added.
With debt bubbles threatening to pop up all over the place, the last thing Beijing needs now is a major debt crisis to wreck its birthday bash.