China’s banking problems heighten recession fears

AS if the woes of the pandemic and the fallout from the Ukraine-Russia war weren’t enough, bad news from China’s real estate and banking sectors have stoked fears of a global recession.

Bloomberg reports a division of Sanford C. Bernstein Co. saying “30 real estate developers with $1 trillion in liabilities” in the world’s second largest economy (China) have defaulted. Another report says 28 of the top 100 real estate developers failed.

Property sales in China for the first half of 2022 fell 72% as property developers were burdened with $9.2 trillion in debt, half of which is exposed to mortgages.

Both due to the problem of unemployment (related to Covid) and the inability of property developers to deliver the properties (subject to mortgage) there is an ongoing ‘mortgage strike’ involving 203 projects spanning a broadband to 86 Chinese cities. People simply voluntarily refused to pay their mortgage debts.

Among the biggest victims is Ever Grande, one of China’s two largest real estate developers. It is estimated that 50 million homes have been foreclosed, but falling prices result in “negative equity” on the collateral value.

This is where the biggest problem for the state arises when the collapse of real estate (also) leads to the collapse of the Chinese financial system. Cracks have already appeared in recent months and, if they do not diminish, they could aggravate the problems of the Chinese economy. It is said that at least a third of the banking system is exposed to the real estate sector in China.

Deteriorating asset quality on bank balance sheets is preventing banks from recovering loans and putting pressure on their cash management. The two large public banks (at least four of them) and especially the 1,600 so-called village banks (representing 30% of the number of banks) are already rationing the withdrawal of customer deposits.

Not only is this shaking people’s faith in the financial system, but in some cases it has led to violent protests that have been broken up by state and private security gangs. In some cases, not only was the number of depositors who withdrew limited, but the amounts withdrawable were limited to only 1,000 renminbi per depositor.

If left unchecked, analysts say, this financial crisis can lead to political instability that China cannot afford given the already fragile foundations of its economy today. There are plans to issue trillions of government bonds to inject liquidity into the banking system and different funding for infrastructure projects to save drowning developers from certain death. Are they sufficient given the scale of the problem?

What is happening, observers note, is a de facto massive “bank run” on China’s vast geography and contained only by the violent restraining power of the state. How long will this last? Certainly not forever; because people have to eat and live.

People may find it easier to give up their political rights, but the same is not true when it comes to ensuring their survival as human beings.

Certainly, the collapse of real estate is not solely responsible for the weakening of the Chinese banking system. Corruption is another contributor.

For example, some 63 bank executives from 100 rural banks have already been arrested for unethical banking practices. A president of a large bank was replaced by the vice-mayor of the locality where he was domiciled for the same reason.

There have been illegal auctions of bank shares sold at deep discounts to bolster liquidity. Significant shady banking mergers were carried out with foreign financial institutions, but were largely aimed at laundering money from China, to favor individual Chinese stakeholders. A prominent banker, YI, allegedly fled to the United States after embezzling billions of “quasi-deposit” money from individuals he had sneakily convinced to share their money but not registered as “official deposits” of his own bank. Etc.

In the majority of cases, transactions were conducted online, which made tracing more difficult in the absence of supporting documents and other paper evidence.

Fourteen years have passed since the “subprime mortgage meltdown” in the United States, which reportedly resulted in losses of $17 trillion, in total, and saw the collapse of Lehman Brothers. A serious threat to China’s financial system staring Beijing’s face is of a similar nature.

The timing couldn’t be worse with new variants of the virus looming again and the Ukrainian-Russian imbroglio showing no respite yet. If the situation in China implodes, a recession becoming real will no longer be just a prophecy. It is an accomplished.

Zoilo “Bingo” P. Dejaresco, a former banker, is a financial consultant and media professional. He is a life and media member of Finex. His views here are however personal and do not necessarily reflect those of Finex. E-mail [email protected] Learn more about #FINEXPhils via www.finex.org.ph.