Chinese banks might soon be contending with a series of bad loans, and that could bring the system crashing down. That will send shock waves through the global economy.
Bloomberg reports that Chinese banks are going to struggle to recover more than $1 trillion worth of loans to government infrastructure projects that are incapable of generating the kind of revenue to pay off the debt.
The International Monetary Fund has warned that Chinese banks might have 1550 billion yuan ($228.3 billion) of bad loans to local government agencies across the country.
Writing in Seeking Alpha, Patrick Chovanec, an associate professor at Tsinghua University's School of Economics and Management in Beijing, says a big part of the problem lies with the governance of Chinese banks. Chinese bank executives, he says, are not managers but government officials and the boards are stacked with people from the party. This is why the banks were at the forefront of the Chinese government's stimulus package. This is the way it works: the Chinese government sets the interest rates and the banks have access to low risk spread income. This means that they have very little incentive to manage risk.
This is a major concern because China is the engine room of the global economy. Not that the Chinese banks will close down. The Chinese government will bale them out. But that will mean less money to spent in other areas safeguarding the domestic economy, and driving the global economy.
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