China's Banking Sector Risks and Implications for the United States   [open pdf - 895KB]

From the Introduction: "Over the past decade, China's banking sector has grown fourfold from $10.2 trillion in 2009 to $41.6 trillion at the end of 2019 and is now the world's largest. However, this expansion was not matched by commensurate economic growth during the same period. China's gross domestic product (GDP) increased by only $9.2 trillion between 2009 and 2019, and the pace of growth slowed significantly, already hitting a 29-year low before the COVID-19 [coronavirus disease 2019] pandemic. This mismatch between bank-sector expansion and decelerating growth reflects decreased efficiency in the allocation of financial resources as new credit generates diminishing economic returns. Behind China's significant corporate debt burden is a mountain of bank loans, a significant portion of which are backed by opaque, high-risk assets. Beijing's current regulatory approach to the financial system can largely be understood as an attempt to reduce the threat these risky assets present to overall financial stability while keeping borrowing sufficiently high to stimulate growth. This report reviews the structure of China's banking sector and the causes of its current challenges. It then assesses recent regulatory efforts to curb risky lending, offload bad assets, and recapitalize banks. It concludes by examining China's booming retail banking market and analyzing the implications of China's banking policies for the United States."

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