China’s banks are growing rapidly, climbing up the global rankings, and could one day be the world leaders in the banking industry. Or they are institutions riddled with bad debt, propped up by the state, that could one day collapse in the Chinese equivalent of the subprime crisis. Views on China’s banking sector can lie anywhere on the spectrum between these two extremes, but whatever the view of China’s banks, their problems cannot be ignored because of the sheer size of these institutions.
Among the areas of concern are the rise of shadow banking and off-balance-sheet activity, the level of non-performing loans (NPLs), and overexposure to local government debt and the property sector. While many agree on the problems, the degree to which they pose systemic risk and their potential to cause a banking crisis is hotly debated. Opinions vary on the true state of China’s banks and what lies inside them. They can be viewed as healthy and profitable with ample reserves, or they can be seen as part of a system where the level of risk and bad debt has been hidden.
