China surpassed the Eurozone and took the first place on the size of the banking system in 2016. The volume of assets reached $33 trillion versus $31 trillion in the currency bloc, $16 trillion in the United States and $7 trillion in Japan. Thus, the rate is 3.1 times higher than China’s GDP, as against 2.8% in the Euro zone. This indicates a growing role in the international financial sector, according to authorities from borrowing to overcome the effects of the global crisis and stimulate growth of the national economy, writes the Financial Times. “The enormous size of China’s banking system is not so much reason for joy as it is a sign of excessive dependence on Bank Finance, exacerbated by the inefficient distribution of resources and high credit risk”, — the newspaper quotes the Professor of Cornell University Eswar Prasad, was previously in charge of Chinese direction in the IMF.
World leaders welcomed the measures of Beijing to ensure stable global GDP growth when the developed countries were in deep stagnation. Now, this policy turns into a wasteful investment, overcapacity and dangerously high levels of debt. Analysts note that, in contrast to developed markets, Chinese regional governments rely on Bank loans to Finance infrastructure projects. A key role in this policy played by state banks (especially China development Bank, whose assets exceed $2 trillion), with the support of private financial institutions. “On the balance sheet of Chinese banks is a significant amount of hidden loans to regional governments that appear as loans to the business; it distorts the borrowing, if we draw a comparative analysis with other countries, the FT said Bank analyst Hu Wei from the Hong Kong branch of an international investment company Sanford C Bernstein. — In most other economies, the government directly raises funds on the capital markets in China has created a unique situation”.
Economists argue that developed capital markets can help China to diversify the financial system and reduce its heavy dependence on banks. More diversified financial system, in turn, will limit the ability of the Communist party of China on the management of financial flows. “The dual approach of the Chinese authorities to the financial markets — using it as a convenient mechanism for the allocation of resources and the unwillingness to grant them full freedom to maintain control and stability — often increased the volatility of markets and reduced their effectiveness,” concludes Prasad.