The World Bank has sharply slashed its annual growth forecast for China, warning that Covid disruptions could further slow economic recovery
The World Bank has sharply slashed its annual growth forecast for China, warning that Covid disruptions could further slow economic recovery AFP / STR

China is not a market economy, hence major enterprises and banks in the communist nation are all owned and manned by the government, which makes cleaning up bad loans easier.

Chinese banks' net interest margin fell to 2.04 percent in the first quarter, from 2.1 percent in 2020. The margin is expected to fall further as risk-averse banks have started parking their money in low-risk instruments.

Last month, the CSI300 Bank Index in China lost 0.7 percent over the same period over concerns over the strong banking fundamentals.

Stoking fears of a greater credit crisis, banks, including Yu Zhou Xin Min Sheng Village Bank, Shangcai Huimin County Bank and Zhecheng Huanghuai Community Bank in Henan Province, barred depositors from making withdrawals in late April, forcing depositors to resort to public protests.

To help lift the real estate sector, which is currently struggling with liabilities, state-owned asset management companies (AMCs) have been asked to come to the aid of property developers by easing their financial distress.

AMCs will be allowed to buy developers' liabilities and will extend the repayment deadlines by restructuring them.

Chinese banks issued 1.3 trillion yuan ($194.71 billion) in net new loans last month, which was 645.4 billion yuan in April. However, the new loans are lower than the 1.5 trillion yuan issued in the same month a year ago.

Any turmoil in the Chinese banking sector will have deeper repercussions abroad as Chinese banks' external debt balance reached $1.19 trillion at 2021-end, up by 30 percent from the previous two years.

Already, the World Bank (WB) has reduced its growth forecast by nearly a third to 2.9 percent for 2022. Growth could fall by 2.1 this year and 1.5 percent in 2023, WB President David Malpass has said.

While other leading economies, including the US and Japan, are tightening their monetary policies China is easing them to revive growth by ensuring more liquidity in the market.

Under the financial stability security fund, a total of 64.6 billion yuan ($9.7 billion) has already been mobilized from big banks. The plan is to make it a $100-billion entity by September due to a cooling domestic economy and leading economies in the world tightening the monetary policy.

The fund will come to the aid of banks, insurers and leasing companies in case of collapse or losses, fuelled by global market turmoil that can undermine the country's financial system as a whole.

In the short term, the fund will come to the rescue of cash-strapped businesses and will provide more liquidity to the market as vital Chinese cities like Shanghai are emerging out of the pandemic curbs.

China already possesses smaller bailout funds, which were pegged at 182.9 billion yuan at the end of 2021, mainly meant for the insurance and trust industries. The new bailout framework will serve as a buffer in case of liquidity crunches or destabilizing losses.

China fears that after the U.S., EU and Japan raised interest rates there will be downward economic pressure on the demand for Chinese exports from these nations. On the domestic front, the challenges include the economic impact of the zero-COVID policy and a correction in its massive real estate market.

Politically, President Xi Jinping is widely expected to seek yet another term as Chinese Communist Party (CPP) chief at the party congress this fall. So, the party leadership does not want to leave the country's banks at the mercy of struggling borrowers when Xi starts his third innings as CPP chairman.

The CPP as a policy measure has decided to put more thrust on the domestic market over overseas markets. Moreover, the new funds can address renewed lockdowns if the pandemic strikes again.

The U.S., the largest economy in the world, has the Dodd-Frank financial reform law which promises funds for the institutions that are "too big to fail". The 27-member trade bloc EU can chip in with aids under the Single Resolution Fund when its large corporations face the threat of meltdown.

After it faced the financial turmoil in 1990s Japan came out with a 12 trillion yen ($92 billion at current rates) bank bailout fund to bring the troubled economy back on track.