China is on the brink of a serious economic crisis

As China struggles to contain a spate of bank runs, capital flight and credit risks, economists and regulators are warning that the country is on the brink of a serious economic crisis. Over the past year, Chinese banks have lost around $220bn in value, with the country’s second-largest bank, Credit Suisse-like Jiangsu Haian Bank, this month collapsing and being placed into state control. The country's stock market, which is worth nearly half of its GDP, has fallen 25% over the past year. The Shanghai market has lost nearly a quarter of its value over the past 12 months, hitting its lowest level since 2008. House prices, meanwhile, have fallen 20% nationwide over the past year. In some cities, they have plummeted by as much as 50%. China's economy has slowed sharply over the past year, growing at its slowest pace since the 2020 pandemic. The country's gross domestic product (GDP) expanded just 3.3% in the second quarter, the slowest rate since 2020, while investment growth slumped to a nine-year low. Revelations of a $500bn hole in the banks' balance sheets last month added to the sense of alarm, as regulators raced to contain a surge in deposit withdrawals. “China is on the cusp of a major economic crisis,” said Ding Shangfon, founder of Beijing-based advisory firm, Ding Shangfon Advisory. “The government will have to spend a lot of money to rescue the banks.” China's banking sector is now the most indebted it has ever been, with system-wide leverage at 14 times GDP, far higher than any major economy except Japan. Regulators have spent billions of dollars propping up troubled lenders. But despite their efforts, the crisis shows no signs of abating. China's financial woes are being driven by a toxic cocktail of rising defaults, capital flight and a collapse in confidence in its banks. Households, businesses and investors are all cutting their exposure to the banks, which are struggling to lend and raise new capital. As the crisis deepens, there are concerns that China's slowing economy will push even more companies into default, wiping out billions of dollars in investor value and further eroding confidence in the banks.

China is on the brink of a serious economic crisis

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