[경제시평] China’s ‘government finance’ and banking crisis

There are signs that China’s real estate recession may spread into a financial crisis. The 42 large Chinese listed banks announced on the stock market reduced 40,000 employees in the first half of the year. Of these, 20,000 belong to the six major commercial banks. The six largest banks are large enough to account for 60% of all loans in China. The Industrial and Commercial Bank of China, the largest, ranks first in the world in terms of assets. This is evidence that even state-owned banks, which were called “too big to fail” or “iron rice bowls,” are facing serious management difficulties.

China’s real estate recession shows signs of spreading into a financial crisis

Of the 1,100 senior executives at listed companies who retired in the past month, half are from banks. Banker wages also decreased by an average of 5,321 yuan as of the first half of the year. In terms of monthly salary, this is a reduction of 887 yuan. There are about 2.55 million bankers across China. The restructuring of 42 listed banks is, in a word, ‘new blood’. The cause of the banking crisis is the decreased demand for loans over the past two years.

This is because more and more small and medium-sized businesses are closing down due to the economic downturn, and households are also taking steps to repay real estate loans early. In particular, real estate investment, which has accounted for more than 30% of China’s domestic GDP growth, decreased by about 10% by the end of September. It is a structure that inevitably increases the debt of banks that make a living through the interest business.

This is the reason why the central bank lowered the loan prime rate (LPR) for one-year maturity to 3.1% and the LPR for real estate loans for five years or more to 3.6% by 0.25%p each. The bank reserve ratio, which was cut by 0.5% point, is also expected to be further reduced by the end of the year. The intention is to increase liquidity supply as the GDP growth rate remained at 4.8% as of the end of the third quarter.

However, even if the loan interest rate is lowered, there are no suitable places to lend money. Loans affect a bank’s financial structure. The borderline for the deposit/loan margin ratio commonly used in the international financial world is 1.8%. If it falls below that, wage cuts and job cuts are inevitable. In the case of Chinese state-owned banks, the deposit and loan margin ratio, which was 2% in the first quarter of 2022, has fallen to 1.5% in the third quarter of last year. The deposit and loan margin ratio of Industrial and Commercial Bank of Korea, the largest bank, is only 1.43%.

China is a government-run financial system. Looking at the shareholder composition of the Industrial and Commercial Bank of Korea, the largest shareholder is the Investment Corporation under the State Council. It is an institution that invests foreign currency reserves, etc. The remaining government shares, including the Ministry of Finance and pension funds, together amount to 70%. Local governments have local banks. Thousands of rural commercial banks are also affiliated with local administrative units. Even listed banks do not operate independently.

In the case of the Industrial and Commercial Bank of Korea, it is responsible for providing loans to railway groups, petrochemical companies, and military companies. The railway group’s sales in the first half of the year were 600 billion yuan, but its operating profit was zero. In the case of high-speed rail, only 6%, or 2,300 km, of the 45,000 km operating route are profitable. Of the 26 trillion yuan in loans from Industrial and Commercial Bank of Korea last year, the railway group accounted for more than 10%. 36.1% of the railway group’s debt belongs to the Industrial and Commercial Bank of Korea.

The same applies to the lending structure of urban commercial banks controlled by local governments. It simply allocates residents’ savings funds to suit local government needs. It is a structure in which banks have no choice but to endure the local financial crisis. According to IMF statistics, the outstanding debt of loan corporations established by local governments is 65 trillion yuan.

Including bonds directly issued by local governments, debt is 85% of GDP. Adding up central government debt, it exceeds 100% of GDP. It is above the international borderline of 60%. It is difficult to even identify the shadow debt hidden by local governments. Banks’ depreciation provisions are usually around 1%. Banks are also in a position where they cannot cover large amounts of debt.

There is an urgent need to move away from government-led finance and create a capital market.

The government-led policy of investing commercial bank funds into the technology sector also does not comply with market rules. It is difficult to satisfy the demand for technology creation loans through indirect financing. It is also the responsibility of a country that has entered the post-industrialization stage to foster new loan platforms and match them with the financial market. It is correct that technology loans are made in the stock market, which is a direct financial market, not in banks. This is the real reason why China’s capital market is urgently needed.

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