The bad debts of China’s largest banks continue to grow and the financial bubble seems to be on the verge of bursting. Pessimism and disbelief about the Chinese banking system fell to unparalleled levels, even below those recorded during the U.S. housing crisis in 2008.
China’s four largest financial institutions, including the Industrial & Commercial Bank of China Ltd., realized current worth of just 0.4% of their book value.
These values are similar to those recorded by JPMorgan and Bank of America Corp. during the great U.S. housing crisis of 2008.
Although these crises are different, there are many points in common that foreshadow the possible collapse of the Chinese economy in the not too distant future.
The recent collapse of Chinese banks reflects widespread investor distrust in the banking system, driven in part by growing concerns about bad debts.
The post-pandemic revival of the global economy has spurred a surge in new Chinese bank lending, allowing the sector’s earnings to remain stable for the time being.
But the Chinese communist regime’s “zero-COVID” policy, coupled with the country’s deepening real estate crisis, are significantly increasing the risks to the banking system and consequently lowering its stock market valuation.
In addition, China’s macroeconomic data is extremely discouraging for the sector. Chinese GDP during the third quarter shows that domestic demand continued to decline mainly due to the Orwellian lockdowns and quarantines imposed by the regime, which caused the real estate sector to deteriorate further.
In this scenario, banks are forced to reduce their interest rates to encourage lending, which translates into an automatic drop in their profit margins.
The real estate crisis is at the root of China’s financial conflicts
The financial and real estate markets under China’s communist regime have been on shaky ground since the crisis of Chinese real estate giant Evergrande became evident over the past few months.
The immediate result is that the entire sector has now become a huge bubble about to burst.
This phenomenon called a “financial bubble” arises when the market reflects the explosive increase in the price of real estate due to high demand and low supply. Faced with this situation, financial speculators inject more money into the market, causing a further increase in demand.
Then, at a certain point, peak demand begins to fall, while supply continues to increase. When that happens, the bubble bursts. And this is exactly what is happening today in China.
In short, the bubble in the communist regime’s real estate market has led to a steady rise in property prices, and construction companies took advantage of the situation and rushed to build more houses and buildings without noticing that demand was falling at an outrageous rate.
The result was that today construction companies have millions of unsold and unfinished properties, and no liquidity to continue.
At the same time, the clients who trusted and started to pay for their houses find their property half built and the construction companies cannot tell them when the houses will be finished because they do not have enough funds to continue.
Banks lack liquidity as a result of the crisis
Protests are not common under the Chinese communist regime. However, during the last few months thousands of small savers decided to complain in various parts of the country about not being able to withdraw their savings from banks, mainly in the Henan region.
Several banks blocked fund withdrawals alleging system reforms and other not very credible excuses.
In many cases these restrictions have continued for extended periods since April, which is why thousands of customers decided to face the dangerous consequences of protesting in China.
The reality shows that the Chinese banking sector, especially the firms distributed in rural areas such as Henan, were hard hit by the measures implemented by the regime authorities to contain the real estate bubble and the growing indebtedness of the sector. The financial restrictions established have had repercussions on all economic activity in the country.
Role of the Chinese regime in the crisis
As with everything that happens in the communist country, the regime is ultimately the one that determines the course of how, when, and what should be done in all economic activity.
The real estate market is no exception; in fact, it was the business chosen by the regime as the engine of economic growth in earlier decades.
Real estate and related sectors are one of the key drivers of the Chinese economy, accounting for more than 30% of total GDP.
The proportion of economic output related to construction and associated activities is much higher than in other major economies, notes leading economist Mark Williams.
The Chinese regime has taken measures to counter the real estate crisis, such as reducing initial deposits, tax rebates, and subsidies for homebuyers. It also made available a new line of loans to help builders and thus prevent construction from coming to a standstill.
But none of this seems to be enough, and the real estate bubble, which in some way boosted the country’s economic growth, is bursting. Now the reality is hitting companies and society in general, and they are beginning to see the effects in their pockets.
The increase in youth unemployment rates in China is alarming. The economy is going through the worst of its economic crisis and companies amid the uncertainty have stopped hiring and some have started to reduce their numbers.