A future economic slowdown could place Chinese banks and political leaders in a serious bind.
China’s banks and other local lending institutions have lent billions to Chinese companies over the last two years. That is good news for many state-owned enterprises in a sluggish economy. However, these loans could spell trouble ahead. Heavy debt could be difficult for these companies to repay as demand from the US and the EU slips in 2014. Slow repayment could put the state-owned lending institutions in a cash bind.
Cash-strapped lending institutions or cash-strapped major employers could put the political leadership in the tough position of having to admit problems – not a position the leadership would welcome. In addition, these problems could force consolidations that would in turn force layoffs, also a politically unpalatable situation.
China’s massive loan programs to state-owned enterprises have another consequence. Private enterprise is crowded out of the credit market, hurting their potential to survive. Ironically, these private businesses are profitable. According to an independent think tank in Beijing, state-owned enterprises have been unprofitable between 2001-09 once government support is removed from the equation.
Any way you look at it, there are troubles ahead for China, and by extension, these problems can be expected to negatively impact US exports to China. I find it interesting that massive government loans and other support of unprofitable businesses could land China into a lot of trouble. Perhaps there is a lesson for the US in there.