China’s Banking Collapse?

James Waterton has an interesting, but frightening piece on the brittle nature of China’s banking system – in 2007 under WTO rules, China must open its banking system to foreign competition, and if the number of bad loans being written by Chinese banks is accurate (Standard & Poor’s estimates it could be as high as 50%) that could cause a major flight from Chinese banks to more stable foreign ones. These NPL’s (Non Performing Loans) could shatter the brittle Chinese state-run economy> As Waterton explains:

I believe that the Chinese banking sector’s dire straits constitute the gravest threat to global stability in the coming years. The Chinese government is always harping on about its “deepening” banking and state-owned industrial enterprise reforms, and this is a mantra is being repeated across the world. Unfortunately, the Chinese state is so opaque that it’s impossible to verify the veracity of such claims, and the unrealistic numbers being thrown at us by the Communist party (like the drop of NPLs from 25% to 12% in less than five years) and the shonky juggling of bad debt from one insolvent bank to another woefully undercapitalised holding company do not inspire much confidence in the nature of the reforms. Frankly, I believe the banking sector is too far gone to reform without collapse. In international terms, the crisis in the Chinese banks and SOEs is an elephant that stands in the middle of the room, but everyone is either perceiving it as a mouse or trying to pass it off as a mouse.

The biggest threat from China isn’t that it will take over the US economically, it’s that the Chinese economy is a house of cards, and one fell wind could knock the whole thing over. When that happens, the ripple effects across the globe will be nothing short of disastrous. Economic reforms may only ameliorate, not fix, China’s economic problems, but it’s still crucial that Western governments push China towards reform.