China’s banks under serious scrutiny

An article in today’s New York Times points out that credit agencies fear China’s government-owned banks may require a major bailout thanks to overdue loans.

Responding to hints in recent weeks from senior Chinese financial regulators that another bailout of the country’s biggest banks might be needed, two credit rating agencies issued separate reports on Wednesday suggesting that China’s previous efforts had not solved the banking system’s troubles.

The ratings agencies, Standard & Poor’s and Moody’s Investors Service, said that the banks’ troubles had not been resolved by an attempt in 1999 and early 2000 to shift $170 billion in nonperforming loans into asset management companies. The companies resemble the Resolution Trust Corporation that the United States used successfully to dispose of bad loans after the collapse of much of the American savings and loan industry in the late 1980’s.

Gordon Chang, author of The Coming Collapse of China, always maintained that China’s banks are hopelessly insolvent and would prove to be China’s Achilles heel. Things still look okay, but if the slowdown feared by so many materializes, a serious problem, starting with the banks, could escalate into a catastrophe.

I’m not trying to be an alarmist, spreading hysteria about China’s imminent collapse. (It may not be imminent at all.) It’s just that China’s banks seem to be an elephant in the corner of the room that everyone wants to ignore. It’s a big elephant.

[Update, 7:35 am Nov. 7.]

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