Why The Chinese Banking System Is A Ticking Time Bomb?

File Photo: The People's Bank of China Headquarters. Image Credit: Max12Max. Licensed Under CC BY-SA 4.0.

The Chinese government poured 4 trillion RMB into the financial crisis of 2007–2008 stimulus and this went to things such as building roads or building new steel factories. This increased industrial capacity to such an extent that it has now turned into excess capacity i.e. capacity that is unnecessary and not used. The problem is that the Chinese government has not stopped spending on improving unnecessary capacity to show 'economic growth'.

Most of the money spent by the Chinese government is in the form of loans from Chinese state-owned banks. A lot of the businesses, particularly steel, power, and automotive, that have received these stimulus packages are now going bankrupt due to overcapacity. This is causing debt to grow enormously at levels never seen before.

As of March 2020, China’s total domestic debt was 317 percent of the country’s GDP. Some reports say that there are many loans that are off the books as well. China's banks are facing about US $1.7 trillion in losses. The scale of the debt in China is so large, that China has allowed some players to publicly fail. In 2019, Chinese corporate borrowers defaulted on nearly US $20 billion in loans.  This shows that the Chinese banking system is a ticking time bomb and if it were to explode, it will take the Chinese economy along with it.