The Forbes magazine, an American financial and business magazine, reported that China’s financial crisis is worsening, but the Bank of China’s problems are not surprising. In fact, this is just a continuation of the spreading crisis that started more than a year ago. That’s when Evergrande, a major property developer, announced it could no longer support about $300 billion in debt.
“Forbes” reported on its website that at the latest stage, Chinese banks, which are expected to suffer huge loan losses, have taken significant measures to increase bad debt provisions, and the funds received from the Chinese bond market have increased compared with last year. about 30%. Beijing apparently failed to understand what was to come in the wake of the Evergrande crisis, refusing to take swift or sweeping action to stop the spreading failure of China’s financial industry.
The report continued that these failures and crises typically continue to spread until Beijing takes more decisive action. What China is going through is like a textbook explaining how a financial crisis unfolds. Failure in one place leads to failure elsewhere, and the associated fear and lack of confidence prevent their systems from functioning effectively or supporting economic growth at all. From the moment Evergrande declared bankruptcy, trouble began to spread. Any company or financial institution that expects Evergrande to fulfill its obligations will face losses immediately.
By the nature of finance, all who rely on these companies and financial institutions also face immediate losses. All borrowers and potential business partners have questioned the viability of others, and these doubts have intensified as other developers have followed Evergrande with similar announcements. That suspicion of others spread further to Chinese mortgage lenders when Chinese lenders threatened to stop paying their mortgages, fearing the developers would never complete their contracted projects.
With most banks involved, the threat has Chinese savers worried about the safety of their funds, a concern that has become especially acute when Chinese banks unilaterally restrict withdrawals, and the financial problems have had a clear economic impact. Weakness in China’s economy is already evident, and while government spending on infrastructure is still increasing, the economy is likely to fall well short of the 5.5 percent real growth target that has been downgraded this year.
Many blame China’s economic weakness on Beijing’s draconian lockdown and quarantine in response to the Wuhan pneumonia epidemic, and these are undoubtedly the reasons, but the financial crisis, which has been underestimated by Beijing and the Western media, has far-reaching consequences. When people worry about the safety of their bank deposits, they slow or stop spending. And when lenders worry about the viability of businesses and individual borrowers, they stop funding promising projects, and when those involved in business arrangements worry about the viability of their colleagues, programs stop.
All of this has slowed business and development, and it’s becoming increasingly clear that the fate of China’s steel industry is a perfect example. About 29% of steelmakers declared near bankruptcy as property developers halted their plans and because of a lack of credit. China’s steel industry, which sold billions of tons of steel last year, about half of the world’s output, and made huge profits, is indeed down sharply.
“The entire industry is losing money, and there is no turning point in sight,” said Li Ganpo, founder and chairman of Hebei Jingye Steel Group. And these problems will naturally spread. Iron ore prices have fallen 36% since March. Steel is just one example. China will continue to see losses of this type until Beijing moves to stop the spread of failure.
Much of this economic pain could have been avoided if Beijing acted immediately after Evergrande declared bankruptcy. Authorities can cut an unstoppable spread by lending directly, not to failing developers, but to others in the financial system to mitigate the losses they face as developers fail. This will help restore confidence and ensure lending continues to drive business.
Alternatively, the People’s Bank of China (PBOC) could increase the flow of loanable funds to the system so that private and state-owned banks have the ability to lend more aggressively, with sufficient financial buffers to reassure customers about the safety of their deposits, but Beijing has not acted , so financial failure and the fear of such failure spread throughout China’s financial system. Unless Beijing implements such a policy, such progress and its ill effects on the economy are bound to become increasingly serious.
Sadly, there are few signs that Beijing is fully aware of this need. So far, the Politburo, China’s premier decision-making body, has insisted that local and provincial governments take the lead in addressing fiscal pressures. And shedding blame in this way shows that the Chinese leadership has studied Washington more thoroughly than previously thought. The joke aside, this prevarication and lack of action is not good for the Chinese economy.
Even in the best-case scenario, local and provincial governments will be unable to cope with the scale required by the financial crisis, but for years Beijing has forced local and provincial governments to fund infrastructure projects designated by central planners Units lack the financial resources to respond to local affairs, let alone the needs of the national financial system. The only one that could fill that role is Beijing, but so far it has resisted action beyond a few minimal rate cuts.