THE PEOPLE’S Republic of China (PRC) has been facing problems in its banking sector.
I am told that the banking issues are not as bad as the ones that led to the 2008 Financial Crisis, but I think they are still indicative of China’s ongoing economic woes.
According to reports, around 40 small and rural banks have disappeared in recent months, absorbed by larger banks or recently established institutions.
The consolidation of the faltering banks is another symptom of China’s declining residential construction sector and a sign of weak domestic consumption.
The more hysterical commentators believe that China’s banking issues will lead to an economic collapse. I, for one, don’t believe that will happen, and I think China’s leaders can manage their banking issue.
The real problem here is that China’s banks are a symptom of a much larger problem, and that is the unsustainability of an investment and export-led system.
When China was growing and was plugged into globalization, capital investment, and therefore banking, was not a problem. Growth attracts capital, but when that very same growth begins to peter out, you end up with bank closures. This isn’t news. What is news is China’s inability to shift from export-led growth to consumer-led growth.
Chinese banks would not have such problems if economic activity could easily be shifted from investments to domestic consumption, but they can’t, so that’s where they are right now.
Japan faced something similar in the past, and despite maintaining a high level of prosperity, they haven’t really gotten out of their economic slump.
Japan and China aren’t the same of course, but unless the Chinese Communist Party can figure out a way to change their economic system, China will likely be facing long-term stagflation./PN
