Global Economic Earthquake: Can China’s Banking System Weather the Storm

China’s Banking Troubles and Stimulus Dilemma: A Shock to the Global Economy

View enlarged image Will the warm wind from China continue? Some are cautious. Photo = Reuters

The Chinese real estate market is in a serious slump, and the banking sector continues to be in crisis.

The real estate market, once the driving force behind China’s economic growth, is now a threat to the entire financial system. According to recent public data, China’s real estate-related debt is a whopping 119.493 trillion won (9 trillion dollars), or about 60% of China’s GDP.

According to an official announcement from the China Banking and Insurance Regulatory Commission (CBIRC), the non-performing loans of Chinese commercial banks will reach 3.2 trillion yuan (about 606.688 trillion won) as of the third quarter of 2023. However, experts estimate that the actual non-performing loans are much larger, raising concerns about the stability of the world’s second-largest economy.

Amid these economic challenges, the Chinese government announced a massive economic stimulus package.

People’s Bank of China Governor Pan Gongcheng said that the reserve requirement ratio will be lowered by 0.5 percentage points to inject 1 trillion yuan (about 189.7 trillion won) of liquidity into the financial market. Key measures include lowering interest rates, lowering mortgage rates, setting up swap facilities to stabilize the stock market, and creating a treasury stock buyback fund.

However, this stimulus is considered weak. Freya Beamish, chief economist at TS Lombard, analyzed it as “a sign that the authorities are seeing a bigger deterioration in growth than investors had expected.” The fact that the government has introduced a small-scale stimulus could paradoxically be a sign that the economy is in very bad shape. In other words, it suggests that the government may not be able to use a larger stimulus even if it wants to. This means that the structural problems of the Chinese economy may be more serious than expected.

The Chinese government’s massive stimulus package could be a double-edged sword in a complex economic situation. In the short term, it may stabilize the market, but in the long term, it could worsen the problem of insolvent banks. This is because the increased liquidity could help to keep insolvent companies alive, which could ultimately lead to an increase in bad assets for banks.

The Chinese economy still faces many challenges. Structural problems include weak domestic demand, excessive local government debt, deflationary pressures due to overinvestment in manufacturing, and trade conflicts with the US and Europe. In particular, if the US-China conflict deepens, the risk of a new trade war cannot be ruled out.

These economic conditions and policy changes in China are expected to have complex impacts on the Korean economy and industry:

First, the impact on the export sector. The slowdown in China could reduce demand for Korea’s main export items. In 2023, Korea’s exports to China decreased by 19.5% year-on-year, and if this trend continues, it could be a huge burden on the Korean economy.

Second, the business environment for Korean companies in China is worsening. The slump in the Chinese real estate market and financial instability may increase the difficulties for Korean companies to operate their businesses in China.

Third, the increase in financial market volatility. Increased uncertainty in the Chinese economy could increase the volatility of global financial markets, which could also affect the Korean stock market and foreign exchange market.

Fourth, there is an indirect industrial impact. If the Chinese real estate market slump continues for a long time, it could have a negative impact on related Korean industries as well due to a decrease in global demand for construction materials.

On the other hand, if China’s economic stimulus measures are effective, it could lead to an increase in exports of Korean consumer goods and intermediate goods, which could have a positive impact on the recovery of the Korean economy.

Global investors are expected to take a cautious approach between China’s bank troubles and economic stimulus measures. In the short term, there may be an increase in investments targeting market rebounds, but in the long term, risk management strategies that take into account the structural problems of China’s financial system will become important. Some investors may adopt a defensive strategy of investing in Chinese state-owned banks or government-backed companies, or reduce their exposure to the Chinese market and diversify their portfolios to other emerging markets.

The effects of China’s bank failures and economic stimulus measures will have a complex impact on the global economy and the Korean economy. The Korean government and companies need to make efforts to reduce dependence on China and improve economic structure by diversifying export markets, fostering new industries, and strengthening corporate competitiveness.

At the same time, it is necessary to closely monitor changes in China’s economic policies and market trends, and to take a strategic approach to manage risks and explore new opportunities. In the short term, uncertainty and risks may increase, but in the long term, it may be an opportunity to explore structural changes in the two countries’ economies and new opportunities for cooperation.

Park Jeong-han, Global Economic Reporter park@g-enews.com