INTRODUCTION:

In order to understand the current crisis of Chinese Bank one needs to understand the Chinese banking system first. Prior to the late 1970s, the Chinese banking system consisted of only one bank – the People’s Bank of China (PBC) The modernisation of the Chinese banking system began in 1978 with the establishment of three specialised banks: the ABC (Agricultural Bank of China) assumed rural banking activities from the PBC; BOC (Bank of China) became responsible for foreign currency transactions and international business; and CCB (China Construction Bank) focused on servicing the construction industry.

In 1984, the ICBC (Industrial and Commercial Bank of China) was established to take over industrial and commercial banking activities from the PBC, which subsequently began to act as China’s central bank and financial sector supervisor. The Chinese Government also established BCOM (the Bank of Communications). In an effort to separate policy related lending from commercial banking in China, three policy banks were created in the mid 1990s (China Development Bank, Import and Export Bank of China, and Agricultural Development Bank of China), and a law was enacted establishing the four specialised banks (ABC, BOC, CCB and ICBC) as state-owned commercial banks responsible for managing their own operations and risks, in accordance with prudential regulations. Non-performing loans (NPL) increased significantly: by the late 1990s the large state-owned banks’ aggregate non-performing loan (NPL) ratio exceeded 30 per cent (Huang 2006). These banks were severely under-capitalised at this time (relative to minimum international regulatory standards) and had only small loan loss provisions (Lardy 1999). The Chinese Government commenced an extended process of restructuring the four largest state-owned Chinese banks in 1998, injecting a total of US$33 billion of capital into them, financed by the sale of bonds to the same banks. All four banks underwent further recapitalisation and disposal of NPLs in the 2000s, and were subsequently listed on the Hong Kong and Shanghai stock exchanges. When China joined the World Trade Organization in 2001, China agreed to a five-year timetable of changes aimed at opening up its banking system to foreign competition; by 2006, locally incorporated foreign-owned banks were allowed to apply for a licence to offer unrestricted local currency services to Chinese individuals. In 2003, the China Banking Regulatory Commission (CBRC) was established to assume responsibility for banking sector regulation and supervision, separating this from the functions of monetary policy and financial system stability that continued to reside with the PBC. The CBRC has been contributing to improvements in governance, risk management practices and transparency among Chinese banks.

The Chinese banking system was not affected by global financial crisis of the 2008–2009. This was because it was focused on a strongly growing domestic market and had little exposure to overseas wholesale funding markets. Apart from these Chinese authorities implemented substantial economic stimulus through a rapid expansion in bank credit, which was largely directed to government infrastructure projects. The increase in banks’ credit in 2009 was equivalent to about 30 per cent of GDP. This However slowed the commercialization of Chinese Banks. (Tan, N., Grant Turner, & Dena Sadeghian. September 2012).

RESEARCH METHOD:

This research is Descriptive study and data is collected from the secondary sources of articles published in the journals, books on the themes of Chinese economy, banking crisis in China and its allied areas, websites, census surveys. Reports relating to Chinese economy, banking and banking crisis in China that come on the newspaper are also taken into consideration.

OBJECTIVE OF STUDY:

1. To know the factors that contributed to the banking crisis in China.

2. To know the short term and long-term impact of Chinese Banking Crisis on Chinese Economy.

3. To know what stepsare taken by Chinese government to curb the Banking Crises.

4. To understand the lessons in store for our country (INDIA).

Factors Contributing to Chinese Banking Crisis:

Fall of Chinese Real estate Developer Evergrande: banking sector of china collapse in which various small banks in China are running into trouble, the people who saved their money could lose their savings people are protesting in front of Henan branch of China Banking and Insurance Commission (CBIC), they were demanding their money after the funds were frozen by four banks in Henan. These banks suspended cash withdrawals in the month of April. This is now restricted to Henan province in China but analyst predict that the problem can be massive. They feel that a bigger financial crisis may be ahead of china and this is only an alarm. This they think is caused by fallout from a real estate crash. (*ppmanthan whatapp1). Chinese property giant Evergrande collapsed as it failed to meet interest payments to international investors, as the liabilities of Evergrande exceed $300 billion. This prompted Fitch, an agency that rates companies ‘financial risk, declare Evergrande in default. (manthan) to practically corroborate the evidence there are hundreds of apartments, towers across China. Social media shows hundreds of people protesting in front of Chinese real estate developer Evergrande. So, the problem lies with the real estate sector of China. The real estate developers are crumbling under mountains of debt. These crises have spread to the Chinese property sector and are dangerous for Chinese economy as well as the economy of world. The analyst feel government should step in but the government is excessively centering on internal security. The real estate market accounts for 30% of the GDP have crashed down. Property sales have gone down by 72%. Thousands of people are protesting in 86 cities of China to get their houses or to decrease the cost of apartments which they bought as they are unable to pay the EMI to the banks. Now there is a banking crisis where the banks are freezing the accounts of depositors. In-spite of all this, experts say, that this is the beginning of the economic crises that is to follow.

What went wrong with the Chinese Real Estate market: to understand what went wrong with the Chinese real estate let us go back to the year 2000, during this time China was a very fast growing Economy. At this time manufacturing revolution of China was at its peak. Companies from all across the globe were setting their manufacturing hubs in the cities of China. Before 2000 China was just like India an agricultural economy. There was no global influence. After 1995 huge population started moving from rural areas of China to urban areas. By 1995 only 29% of population was living in cities of China after thatthe population sky rocketed today 63.89% of people live in urban areas of China (approximately 900 million). Here one needs to understand that in China you cannot buy land; the land can only be leased. So, when so many people started to settle in urban areas of China, the demand for houses sky rocketed. It is simple economics when demand increases the price also increase and more and more players enter the grounds to cater to the demand. In China also hundreds of developers catered to meet this demand. There was a massive rise in Real Estate developers in China. This is a capital-intensive business. So, the Real Estate developers took heavy loans to pay the land lease amount, to build the apartments and to develop the area. They started building the apartments and houses and started to sell it to people of China. From Chinese banks perspective construction was an amazing business to lend to because there was old demands in the market, the business had huge profit margin of 15-20% despite of it being high-tech business. From the states point of view, it generates huge employment along with this it also profits a huge supply chain of steel, glass, cement, bricks and hundreds of other suppliers related to construction business. Real state contributed to 30% of China’s GDP. So, the banks kept on lending, developers kept on building and people of China kept on buying houses. As the demand of houses increased the prices of the Houses kept on increasing. This is how the property boom in the Chinese market started. The real estate prices started to reach new peaks making the Chinese cities some of the most expensive cities in the world. Just to give an estimate as to how expensive Chinese cities became, let us see the price to income ratio in order to understand affordability of houses in Chinese cities. It is the ratio of price of average apartment in that locality to median household Income. If this index is say 12 for a particular locality or city then this means it would take 12 years of a median household income to buy a house in that locality or city. In New-York it is 9.92 years in London it is 17.3 years in Mumbai it is 26 years, in Beijing it is 56 years, in Shanghai it is 50 years and in Shenzhen it is 41 years. If the prices of apartments in China were so high why were people buying them? The reasons are:

1. Urbanization in China

2. In china also like in India you are respected citizen only if you own a house if you do not have a house in China the family will be hesitant to marry their daughter to you.

3. As in India Gold and property is the best investment in the market; in China also property was the best investment instrument in the market. As our elders consider stocks to be dangerous so Chinese people consider spending in equity to be dangerous and investment in property as extremely safe.

So, the Chinese developers build so many buildings for 90 million people that are completely vacant. So last year a trillion dollars were wiped out of real estate sector. This led to the creation of Ghost cities of China where no one lives and huge empty spaces and areas. Most of these apartments are owned by people in the hope that prices of real estate will go up and their investments will appreciate. Now the Government of China realized that it in super bubble where developers are borrowing dangerous sums of money to keep feeding the Real Estate bubble of China. The Government came up with something called “Three Red Line” policy thereby they put forward 3 criteria which the real estate developers to clear only if they clear these criteria they can extend their debts to the bank. These 3 criteria are:

1. Liability to asset ratio of less than 70%.

2. Net gearing ratio of less than 100%.

3. Cash to short-term debt ratio of at least 1.

If these criteria are met by Chinese real Estate developers, then they are allowed annual growth in debt by 15%. If however, it did not fill 1^st criteria then they are allowed annual growth in debt by 10%. If however, it did not fill 1^st and 2^nd criteria then they are allowed annual growth in debt by 5%. If however, it did not fill all the 3 criteria then they are not allowed any annual growth in debt. As soon as these announcements were made all real estate developers started cutting on expenses and started optimizing their finances. Many medium and small-scale real estate developers cleared the criteria. But the china’s 2^nd largest real estate developer crossed all thee marks and this was China Evergrande group. Evergrande borrowed a lot of money and probably it will not be in a position to pay back. It is a ticking time bomb. In October 21, 2021 it owed about $ 305 billion in debt. The firm was to pay $ 124 billion in 2021 but it only had 10% of the amount as cash in hand. The firm owes money to 121 domestic banks and 121 financial firms.

What is wrong with Evergrande? Why this single company has triggered such a massive unrest across China?

The story of Evergrande is straight forward and scintillating, they took tones of tones of loans from banks built huge buildings, sold them and made a lot of money. They were growing and borrowing at such a rapid pace that it started to get more and more dangerous if you look at the growth within just 10 years, they showed astounding increase in revenue. In 2010 the revenue was 45.8 billion Yuan and by 2020 the revenue became 507.25 billion Yuan this is awesome. Behind the scenes they used all the debt not to complete the project but to fund new projects before the old projects sold out. We see in the ten years ie between 2010 and 2021 after they started expanding the gap between the properties under development, contracted sales and completed property/ projects held for sales started increasing; by 2021 they touched a dangerous level where by completed projects for sales were barely one sixth of the properties under development. As a result of superfast growth fueled by huge debt Evergrandeended up crossing all three red lines of the policy. Now they can no longer extend the debts from banks. This is where the chain reaction starts this is how it is going to affect the world’s 2^nd largest growing economy. Evergrand is not the only company to be affected as they have to pay bills worth 100 billion dollars to their suppliers this includes steel suppliers, cement suppliers, paint suppliers, trucking companies, Bricking Companies and thousands of other vendors. This indeed in-turn affects the suppliers of these companies and their balance sheets. The banks who gave loans to Evergrande cannot get their loans unless all the projects are sold out. But as we saw most of these projects are under development. The news of Evergrande getting bankrupt already has sent shock waves in the market so nobody is going to buy those incomplete apartments. So what is even worse is that these apartments cannot be complete without more wavers even the people who paid for their apartments cannot get their houses or lose their money ail-together. So, these angry home buyers are waiting on as many as 1.6 million apartments to be completed. Many of these people have also taken loans and now all home buyers are threatening not to pay mortgage loans at all. If they don’t pay the banks; banks will have to write off 220 billion dollar of mortgage loans. This will put the Chinese bank in a disastrous situation. Mortgage loans account for 20% loans in China so one can imagine how bad the condition is. Evergrande did not borrow from banks alone they also raised billion of dollars from common people in terms of bonds. Even those people will lose money. In October 2021 itself 2/3 of the top 30Chinese developers breached at least one of the three matrixes of red line policy. This means more& more companies defaulting going out of business, more defaulting customers, more loss of suppliers and ultimately collapse of one of the biggest sectors of Chinese economy. This is why there is so much chaos in China. How will china tackle this crisis? How will it protect from this catastrophe. Investment instruments with mind-less social normswill often cost the people and the economy heavily. In this case Chinese definition of a well settled person got a ton of debt piled up for the Chinese people in-spite of the sky-high prices, so you see in-spite of it not making any economic sense because of social construct it has now put millions of people’s life at stake. In case of India same thing happened with FD’s Indians considered FD’s to be safe because of the social norm without understanding inflation. Similarly mind-less purchase of gold is hampering our economy we must think if our instruments are backed by strategy or by social norms. Piling up of debt of any company might showcase accelerated growth in the beginning but in today’s volatile, uncertain market conditions it comes at the risk of everything falling apart at once in our case just like Evergrande the Adani group is taking huge amount of debt it sounds both risky and genius. We must look forward that Indian business-men should prosper and become the pillars of economic growth but at the same time we must keep an eye on implications in case they start defaulting. Just like China had a huge supply chain, Banks and the people that they were affected. If, a big group in India starts falling our country will also face trouble. China being a monopoly with solar components and cobalt, as Chinese banks have curtailed lending, the cost of these things to India might increase. We must keep an eye on solar and electric stocks.

Crisis in China’s financial system: The financial system is under extreme stress due to:

1. Poor capital turnover.

2. There is liquidity crunch in the financial system.

3. The global and domestic economic slowdown.

4. Dynamic zero COVID policy has fueled the crises further.

5. The Russia-Ukraine conflict abroad.

This financial crisis is causing slowdown in China’s economy. These are also partly responsible for the current banking and real estate crises. Chinese banks are interconnected with the global financial system some of the banks are world’s largest banks with their stakes in other countries this deepens the risk of spill over of financial crises to the other parts of globe. Similarly Chinese real estate market is closely intertwined with the global market. This further will slow down in global economy.

Corruption in Chinese bureaucratic system also responsible for Banking Crisis:

Henan’s financial crisis emerged from its provincial capital Zhengzhou, which is considered “ground zero” of the crisis. Over 40 billion renminbi is missing from bank deposits in Henan. Back in April, four rural banks in Henan – Shangcai Huimin County Bank, Yuzhou Xinminsheng Village Bank, New Oriental Country Bank of Kaifeng, and Zhecheng Huanghuai Community Bank – and one in Anhui – Guzhen Xinhuaihe Village Bank – notified depositors that their accounts had been frozen and they would not be able to withdraw money. Further investigations revealed that a private firm, Henan Xincaifu Group, had stakes in all of these banks and had embezzled funds through the use of fabricated loans and internal and external collusion. Furthermore, not only does central China’s Henan province’s banks have to witness the unraveling of the nation’s “biggest bank scam,” but banks simultaneously also have to deal with the mortgage crisis. Clients are boycotting loan payments. The developers find it difficult to complete and deliver unfinished housing projects they want loans from banks. The increasing mortgage boycotts have led authorities to be concerned that more homebuyers will boycott loan payments. Lenders (which majorly are the banks) now have to deal with cash-strapped developers, homebuyer and supplier defaults. The refusal to make loan repayments has resulted in losses being incurred in bank shares. (Kalpit, Mankikar A, July, 2022)

Governments Dilemma: The Beijing government faces dilemma in dealing with 2 old problems:

1. Government easing lending regulations for homebuyers. If it does so people might take undue advantage of implicit government guarantees.

2. Restrictions on bank withdrawals might further de-stabilize banking sector.

According to a Bloomberg report, an emergency meeting was held between the Chinese Ministry of Housing and Urban-Rural Development, major banks, and financial regulators to discuss the growing mortgage crisis. These events have prompted local authorities to set up task forces to focus on resuming work on unfinished projects and mitigating the systemic risks posed by defaulters. Chinese Communist Party (CCP) is most concerned with “wavering public trust” in the Chinese banks. After the protests outside the China Banking and Insurance Regulatory Commission (CBIRC) in Shaanxi on July 14, authorities have moved to reassure citizens that they will be compensated and have promised stricter regulation of pre-sales of houses, to retain public confidence in the banks. The boycotts are politically sensitive as the CCP covets social stability above anything else before the upcoming National Party Congress. The CCP has made attempts to decrease the concerns of people about the banking crisis amid the current mortgage crisis in Henan. A working team has been set up, consisting of the Henan Asset Management Company (AMC) and the state-owned Zhengzhou Real Estate Group, to address and curb the banking crisis ahead of the 20th National Party Congress. The team will focus on reenergize stalled projects, restructuring businesses, and ensuring the completion of housing projects. Premier Li Keqiang has been constantly engaged with the local authorities of Henan to fix the current crisis. Sun Tianqi, the director of the Financial Stability Bureau of the People’s Bank of China, has stated that the CCP is guiding local governments and banks to respond to the ongoing crisis in a manner that fulfils their duty to the people appropriately. He also stated that 99 percent of China’s banking assets are stable and under safe parameters. (Tianqi, Sun, July 2022)

How does Banking crises affect Xi Jinping’s Image:

Unlike other forms of government, China’s political structure ensures the CCP’s powers expand beyond the political realm. The party has control over the market, the judiciary, and more, with its chairman, Xi Jinping, at the center. The party has also decentralized its rudimentary roles to local leaders that are part of the CCP, localizing accountability to the local government. As the Henan protests continue, protestors have made it clear that they are “against the corruption and violence of the Henan government.” They have not mentioned the Communist Party of China; instead, they have invoked a sense of patriotism in their protests and have used Xi’s “Chinese dream” slogan to put forth their appeals to the central government. They protested against the local government’s crackdown and appealed to the central government to mitigate their problems.

Lou Yansheng, the party secretary of Henan province, wrote a public letter addressing the protesters. In the letter, Lou reminded the protesters about Xi’s commitment to ensuring the betterment of the people and said that the CCP became a better party under Xi’s guidance. The letter also highlighted the steps Xi has taken for progress in Henan through comprehensive reform, uplifting people’s lives, and developing the region. Lou’s letter gives an interesting insight into Xi’s authority and leadership – throughout the letter he repeats that Xi’s policies are essential to adhere to as protests continue. Moreover, the letter reassured the protesters that Xi is observing the situation closely and urged them to keep their complete trust in Xi and the Chinese government’s ability to contain the crisis.

Xi Jinping, sitting atop the political hierarchy, enjoys a lot of public trust, and this is unlikely to change amid the current crisis. According to a study conducted by Tianjian Shi, Chinese citizens have a lot of trust and belief in their political institutions, expressing extreme trust in the CCP, the People’s Liberation Army (PLA), and the National People’s Congress. The study also found that people had a lot of distrust toward local governments, explaining why Chinese citizens have localized their protests. Hence, the national-level CCP remains independent from protests against the local government, despite having overarching control over the entire political chessboard. Nonetheless, civilian protests of such a scale and the impending threat of bank runs pose a hurdle in the CCP’s quest for realizing China’s “rejuvenation.”

As the ongoing banking crisis in Henan further develops, it will unfold the impact on the larger political future for Xi Jinping and the CCP. Presently, as seen with Xi’s travels within China in the past year, it seems that he is emphasized on maintaining unity and stability and firm belief in the leadership of party. If the ongoing crisis continues, along with already high public dissatisfaction with the zero-COVID policy, protests against local governments could intensify, forcing Xi to take up actions to retain public trust. (Roy, A., & Nair, S. August, 2022)

CONCLUSION:

The paper concludes that the current banking crisis in China stems from a confluence of factors, including:

· Overleveraged real estate sector: Excessive debt, fuelled by rapid urbanization and outdated social norms around homeownership, led to the Evergrande crisis and subsequent mortgage boycotts.

· Financial system stress: Poor capital turnover, liquidity crunch, and economic slowdown exacerbated the vulnerabilities in the banking system.

· Corruption and bureaucratic failures: Embezzlement and regulatory gaps in Henan exposed systemic weaknesses and eroded public trust.

The government faces a dilemma in tackling the crisis, balancing social stability and financial market confidence. While Xi Jinping's image remains largely shielded from direct criticism, the protests and potential for bank runs pose a significant challenge to the CCP's "rejuvenation" agenda. The future development of the crisis will reveal its broader impact on China's political landscape and Xi Jinping's leadership.

KEY POINTS OF THE CONCLUSION:

· The crisis is multi-faceted, with deep-rooted vulnerabilities in the real estate and financial sectors.

· Corruption and bureaucratic failures have aggravated the situation and eroded public trust.

· The government faces a delicate balancing act, with potential consequences for both social stability and Xi Jinping's leadership.

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Received on 27.02.2025 Revised on 21.04.2025

Accepted on 28.05.2025 Published on 29.07.2025

Available online from August 05, 2025

Asian Journal of Management. 2025;16(3):253-259.

DOI: 10.52711/2321-5763.2025.00038

This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. Creative Commons License.