China’s Ponzi banks are teetering: Corrupt and opaque local lenders could tip the country over the edge


A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. Wikipedia


Ian Williams

China’s Ponzi banks are teetering

Corrupt and opaque local lenders could tip the country over the edge

12 July 2022, 9:15pm

The Henan depositors do seem to be the victims of fraud, but the headache for Xi Jinping is that they blame the government and are unlikely to be the only ones whose savings are at risk. Opaque provincial banks in particular are heavily indebted, weighed down with bad loans, and for years have colluded with powerful local businesses and the local authorities. Loans have typically been made to well-connected firms or individuals with little or no due diligence. It was a recipe for corruption. At the same time, small investors were offered ‘wealth management products’ that typically offered high-interest rates, which were necessary to attract the funds to pay off earlier investors – a classic Ponzi scheme.

Zombie banks could stagger on as long as the Chinese government continued to pump money into the economy, but the economic backdrop has now changed radically. Economic growth is stagnating and the Covid-19 pandemic and the CCP’s ceaseless lockdowns are taking their toll. Bad loans are soaring.

At the same time, after years of soaring real estate prices, China’s property bubble is bursting, with a growing number of developers unable to repay their loans. It now threatens to spill over into the local banking crisis. In 2020, lending to developers accounted for an astonishing 39 per cent of bank loans. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission has described the property market as a ‘grey rhino’ – a very obvious but ignored threat.

Ian Williams is a former foreign correspondent for Channel 4 News and NBC, and author of Every Breath You Take: China’s New Tyranny (Birlinn).

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