People dream about China becoming the world's biggest economic powerhouse. But the reality? China is sitting on a hidden economic disaster.
China's banking sector is in serious trouble. In just one week, 40 banks vanished by merging into bigger institutions. Today, Jiangxi Bank of China's bankruptcy has made things worse. Smaller banks are drowning in bad loans and the ongoing real estate crisis.
There are about 3,800 troubled institutions with 55 trillion yuan ($7.5 trillion) in assets—13% of the total banking system. They've been mismanaged for years, racking up huge bad debts. Many lent to real estate developers and local governments, tying them to China’s property market crash. Some even revealed that 40% of their books are bad loans.
Recently, Bank of Jiujiang said its profits might drop 30% due to bad loans, highlighting the severity of the issue. Authorities want more transparency, but the true scale of bad debt is still coming to light. Even the four state-owned AMCs created to handle bad loans are struggling, with one needing a $6.6 billion bailout in 2021.
China’s strategy for dealing with failing banks? Make them disappear. Of the 40 banks that recently vanished, 36 were in Liaoning province, absorbed into Liaoning Rural Commercial Bank—a new institution created to deal with bad banks. Since September, five more similar institutions have been set up, with more on the way.
The main cause? China’s real estate sector is in deep trouble. Over-leveraged property developers and local governments can’t repay their loans, causing widespread financial instability. Property prices have dropped, and construction projects have stalled, adding more strain to the financial system.
Adding to the mess, banks are using AMCs to offload bad loans, creating a false sense of stability. These AMCs buy bad loans but avoid taking on credit risks, leading to hidden bad debts. The new National Financial Regulation Administration (NAFR) is cracking down on these practices, imposing fines, and increasing oversight.
Expect more disappearing banks. S&P Global says it’ll take a decade to fix this mess. Fewer, larger banks might be easier to regulate, but merging dozens of bad banks just creates bigger problems.
China’s economy is built on shaky ground. Years of credit-fueled growth are ending, leading to slower growth and more banking issues. This will likely result in massive liquidity injections, economic stimulus, and investors flocking to assets like Bitcoin and gold.
