Analysts have been predicting for some time that China’s rise to the world’s premiere economic power was just around the corner. Thge country’s official growth rate is still impressive but it has been slowing. Now the country is tangled in another problem that could slow its growth even further.
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Banks in the country are facing an approximately $300 billion in debts that are unlikely to ever be paid. The number is effectively large enough to force Beijing to do something drastic about the problem.
The last time the country faced such an issue was far too recently. Between 1998 and 2005 the government was forced to put into effect one of the largest recapitalization program in history, saving the banks but costing the country billions. Lessons should have been learned then though now China faces a similar problem and no substantial move has yet been made to solve it.
The country’s four biggest banks, the Agricultural Bank of China Ltd. (SHA:601288), Bank of China Limited (SHA:601988), China Construction Bank Corporation (SHA:601939), and Industrial and Commercial Bank of China (SHA:601398), the “Big Four”, are actively transferring bad loans into AMCs or Asset Management Companies in order to divorce themselves from the probable losses from the loans. All four of the banks closed down by a small amount yesterday.
China’s economic progress has been under greater scrutiny in recent months as spectators wonder if there is a China bubble. If the situation in the banking sector is not resolved decisively and efficiently the country’s problems will only grow. The country is on a road map to liberalize the Yuan, China’s currency, in order to make trade more efficient and become a more integral part of the world economy. A banking crisis could set back that policy for years.
China faces many problems, socially and politically as well as economically, in its effort to maintain growth and become the world’s reigning economic power. Perhaps problem’s, like the crisis in debt management, are simply speed bumps along the road or maybe they are something more. As issues mount up it becomes obvious that the Chinese economy cannot be characterized as simply as many have been doing for some years. It is a large complex country and its economy will resist change.
China is undertaking reforms that took much longer spans of time in the Western world. There has never been a problem like China and it should be treated as such. Its economy is not going to be a simple miracle.