China is creating a system of zombie banks
Aug 14, 2009
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While banks in the West remain reluctant to increase lending no matter how much the authorities want them to, China has forced its banks to lend $1.1trn in the first half, close to India's annual GDP.
Easy money, however, fuels speculation, and some of the liquidity has found its way into stocks and property, leaving both asset markets now 50-100% overvalued and in bubble territory, says former Morgan Stanley analyst Andy Xie.
In the longer term, with the government unlikely to clamp down on lending significantly for fear of derailing the recovery, bad loans are likely to increase sharply, says David Barboza in The New York Times. "Forced lending tends to be foolish lending," as John Foley points out on Breakingviews.com.
The banking system looks "well capitalised enough to absorb a fair amount of pain". But while "systemic collapse" is unlikely, the danger is that banks would be allowed to "endlessly" roll over troubled loans in the hope of eventually getting their money back, leading to Japan-style "zombification" of the banking system.
Earnings would suffer and banks would be loath to make new loans. Bad loans could therefore hamper the "immature banking system" and hence growth for years.
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