China’s pressure point — the banks
China’s economy continues to slow as the property market fails to reach bottom. The technology sector, including EVs, and exports, remain strong but are not large enough to replace real estate. One of the key pressure points in China’s economy is the banking system. For decades, the government has used the banks as the major supplier of credit to subsidize industries and stimulate economic growth. The banks have been forced to roll over loans to indebted local government proxies and buy local government bonds. This will become increasingly unsustainable. The banks’ declining net interest margins (NIMs) are reaching a point below which profitability will be difficult. The average NIMs for U.S. banks are 3 percent.
Harvard economist Kenneth Rogoff has argued that Chinese banks can withstand the pressure on the banking system. “China’s government has more control over its banks than Japan’s did, giving it tools to slow the pace of adjustment: it can let banks avoid writing off bad loans and keep lending to troubled developers and local governments rather than forcing a reckoning all at once. That keeps a banking crisis at bay,” he noted in a recent Stanford University research note.
China is hoping to “slow roll” the country’s economic and fiscal problems until technology provides a new source of growth. (Some call the government’s policy the “shell game” —the operator moves the pea under the walnuts so quickly it is never where the player thinks.)
The fiscal problems are forcing a drop in lending (which is happening already due to a lack of demand), and could eventually lead to a significant recapitalization by the PBOC.
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