While China’s gross domestic product surpassed the EU’s economic bloc in 2011 at market exchange rates, its banking system did not take over the top spot until the end of 2016, Financial Times analysis shows.
The lag reflects Beijing’s increased “financial deepening” — the term for the growth of a country’s financial system relative to gross domestic product. This has been fuelled by an extraordinary increase in bank lending since 2008, when the government unleashed aggressive monetary and fiscal stimulus to buffer the impact of the global crisis.
“The massive size of China’s banking system is less a cause for celebration than a sign of an economy overly dependent on bank-financed investment, beset by inefficient resource allocation, and subject to enormous credit risks,” said Eswar Prasad, economist at Cornell University and former China head of the International Monetary Fund.
Chinese bank assets hit $33tn at the end of 2016, versus $31tn for the eurozone, $16tn for the US and $7tn for Japan. The value of China’s banking system is more than 3.1 times the size of the country’s annual economic output, compared with 2.8 times for the eurozone and its banks.
World leaders and economists lauded China’s stimulus at the time for helping to stabilise global growth at a time when developed countries were deep in recession. Now, however, the stimulus is seen as leading to significant wasteful investment, industrial overcapacity and dangerous debt levels.
Analysts note that unlike in developed markets, Chinese local governments have relied heavily on bank loans to finance infrastructure. Unlisted, state-owned policy banks — notably China Development Bank, with assets of more than $2tn — play a central role, while commercial banks also participate. [...]
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