Four of the five biggest banks on the planet are Chinese—and that’s worrisome

Chinese banks are hugely exposed to the property market.
Chinese banks are hugely exposed to the property market.
Image: Reuters
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In a new ranking of the world’s biggest banks, Chinese institutions have grabbed four out of five of the top berths. The list, created by SNL Financial, is based on total assets. The bank at the top, Industrial & Commercial Bank of China, boasts $3.5 trillion in assets—a loan book worth more than Britain’s annual output, as CNN notes.

Don’t buy the argument that this is yet more proof of China’s gathering economic clout. For starters, it’s not surprising that Chinese banks loan a lot more than everyone else. China, obviously, is huge. But more importantly, banks are the engine of credit driving the Chinese economy, generating more than three-quarters of its total financing.

What’s really worrisome is that the Chinese banking sector’s swelling assets aren’t a sign of the banks’ commercial prowess. Instead, they hint at deep, systemic problems that have put the Chinese economy at risk for a long, painful stagnation.

It’s no coincidence that all four banks in the top five—ICBC, China Construction Bank, Agricultural Bank of China, and Bank of China—are state-owned. They dominate the collection of deposits, as well as having privileged access to equity markets. This setup has long allowed the Chinese government to channel funding to state-owned or state-affiliated companies, which then invest in projects that align with the government’s political and economic priorities.

One such priority was avoiding the effects of the global financial crisis. While other countries funded fiscal stimulus packages through deficit spending—bonds and such—much of the Chinese government’s 4-trillion-yuan ($586 billion) stimulus went through banks. This chart compares asset growth among the Chinese and non-Chinese banks on SNL Financial’s list:

The price of the Chinese government’s unusual control over its economy is debt—including the bank loans that helped rocket China’s bank to the top of the SNL list. All told, China’s country’s banks now have nearly 88.8 trillion yuan in outstanding loans—around 50% more than its GDP.

As the economy slows, their vulnerability to default rises. That’s not just because ebbing growth makes it harder for their customers to make money; in addition, desperate firms are more likely to take big financial risks.

The Chinese government vows to keep growth aloft.  Paradoxically, this makes a recovery less likely, as we recently explored. The hope that growth will pick up encourages banks to roll over loans for customers that can’t pay them back. The more credit that goes to these insolvent “zombie” companies, the less there is for entrepreneurs who need loans to build their businesses. Profits, meanwhile, go back into paying off interest, not investing in new factories or hiring new workers. Prices fall as demand withers, which in turn makes that debt outstanding more expensive—and therefore even tougher to pay off. And so the cycle continues.

The problem for Chinese banks is that the government still depends way too much on banks to power growth. They have to keep lending. That means Chinese banks will keep topping the charts for along while yet to come—and the longer they do, the more worried we should be.