Chinese banks have grown to become the biggest in the world, with the Industrial and Commercial Bank of China having $5.8 trillion in assets under management.
That’s far more than the biggest non-Chinese bank, JP Morgan, at $3.9 trillion. The Bank of China is just above it at $4.1 trillion, with the Agricultural Bank of China and the China Construction Bank at $4.3 trillion and $4.5 trillion respectively.
The world’s four biggest banks, all Chinese, have $19 trillion in total assets, more than China’s entire GDP of $17 trillion.
By comparison US’ biggest banks, JP Morgan, Bank of America, Citi and Wells Fargo, are at $10 trillion combined, just above $11 trillion with Goldman Sachs. While US GDP is at $23 trillion, twice the size of its biggest banks.
What then happens if something goes wrong in China’s banking system? Can the government bail them out?
China’s Financial Tsunami
China’s economy is in its worst shape since data began. A slowdown in the property sector has dampened the mood after ‘Socialism with Chinese characteristics’ became more socialism and less Chinese following numerous interventions by China’s president Xi Jinping in the market.
His zero covid policy has added fuel to a shaken confidence, with numerous data indicating a significant slowdown.
Now, the arrival of high yields in US and Europe may lead to a capital flight, with CNY devaluing beyond 7 to the dollar.
That has prompted intervention by the central bank, PBoC, but politics takes the center stage in two weeks when the great Congress gathers in Beijing.
A return of Xi Jinping for a third term, in contravention of established principles and rules, may well make him the very first ‘official’ dictator of a great power since Mao and Stalin.
That may well lead to foreign capital pulling out, exacerbating stresses, even while turmoil reigns in bond markets.
A bonds liquidity crunch that began in March 2020 is becoming acute as the Federal Reserve Bank moves from the demand side to supply.
With debt becoming more expensive, China’s deeply indebted economy may come under even more pressure.
That in turn may pile on losses in China’s banking system, with some questioning whether PBoC would be able to respond in that situation.
Although they still have plenty of room on interest rates, a sudden sucking out of liquidity may just halt the functioning of the banking system.
Considering just how massive it has become, twice that of the United States, the three decades long debt fueled boom in China may well lead to the biggest crash, maybe ever.
Back to the 90s
The global monetary financial system is re-adjusting. The end of two decades of war, preceded by significant political turbulence in both Trump and Brexit, has turned the elite’s attention to ending the stagnation, both economically and sentimentally.
Western central banks are normalizing interest rates, bringing back risk to the system, lending to the public, and good old fashioned commerce.
The new iron lady, Liz Truss, is responding to the current challenges as Britain did in the 80s. ‘Trickle down economics’ is discredited, US president Joe Biden said, but the wind is somewhat forcefully blowing in the direction of shrinking the state.
The public sector therefore, Fed printing, is taking the back seat, with the market once again taking charge.
This turns upside down the conditions that facilitated China’s rise. A monetary depression in effect in US and Europe during the naughties and tens led to capital seeking returns in China.
The end of that stagnation while China’s economy is maxed out, may lead to a reversal of offshoring in both capital and production.
China therefore may for the first time be tested in regards to just how resilient is their economy.
Their centralized command structure seems to have led to a very centralized banking system, which in turn concentrates risk.
So raising the title question. Now that debt is becoming more expensive, are these banks at risk and if they are, are these banks just too big to bail?
The Chinese government has given indications of nervousness, but a return of Xi – who ruled over a pandemic and trade negotiations which clearly went very wrong – may well suggest there are no intentions to change course.
In which case, capital may dry up, and a failure to adapt may well lead to an answer to the title question as the center moves once again.