Will China's bad loan crisis lead to the collapse of its economy?

WION Delhi Jul 09, 2020, 09.23 PM(IST) Edited By: Palki Sharma

File photo. Photograph:( Reuters )

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China has imposed limits on businesses and individuals in the Hebei province for withdrawing large amounts of cash without prior approval.

China, the originator of coronavirus, would make you believe that they've put the pandemic behind them, however, there is a deep, systemic infection that is ailing the Chinese economy and it stems from the banks.

China has imposed limits on businesses and individuals in the Hebei province for withdrawing large amounts of cash without prior approval.

According to the new restrictions, lenders will have to give one-day notice fot withdrawals of more than 100,000 yuan. Similarly, businesses will have to report transactions of over 500,000 yuan.

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Depositors will be required to share the source of funds, and for withdrawals account holders will be asked about the reason for taking out the money.

This two-year programme will be expanded to the provinces of Zhejiang and Shenzhen later this year. According to another report, 586 banks and financing firms were classified as “highly risky” by the authorities. 

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China’s banks are failing because the country has been fueling its growth with debt and years of borrowing has made the banks hollow. 

As of March, 2020, China’s total domestic debt was 317 per cent of the country’s GDP. Some reports say that there are many loans which are off the books as well.

China's banking system is controlled by 4 big state-run banks which control the financial system and 50 per cent of all loans, so effectively, the government controls the system.

This has given rise to an enormous shadow banking industry, riddled with corruption and expensive loans.
 
The scale of the debt is so large, that China has allowed some players to publicly fail. In 2019, Chinese corporate borrowers defaulted on nearly $20 billion in loans.  

China’s banking system is a ticking time bomb and if it were to explode, it will take the Chinese economy along with it.