Everything is BIG in China: their population, their growth, their corporations, everything!
Turns out their banks are big too.
Or, too big?
The four out of five largest banks in the world are all Chinese. The country has total banking assets worth more than 309 trillion Yuan (which is 3 times its GDP in 2020). In 2008, this number was just 63 trillion Yuan. That’s roughly 5X growth in 12 years.
Take a look:
Well, how did that happen?
China has lent money like a madman in the previous decade (read our coverage on China's mounting debt problem here). Therefore, it makes sense that their banks are the biggest in terms of asset size.
And yes, too big.
So, what could happen to the world economy if the Chinese banks collapse?
We’ve already seen how their eating habits have affected the world.
Can their banking habits take down the world economy at a similar scale? Or, would it be worse?
To understand this, we first have to figure out the extent to which the world economy depends on China.
Understanding the World’s Dependence on China
Except the fact that China owns 18% of global GDP as of 2020, let’s look at the extent to which the world depends on China:
How much does China import from other countries?
It indicates the extent to which countries depend on demand from China.
China is the largest importer of the world.
On top of that, China consumes more than 50% of the global copper and aluminium production.
This is deep. Imagine what would happen if China stops purchasing these commodities. What would happen to the companies or countries that rely on exports of these products?
Let’s take a refresher on the law of demand and supply.
When demand falls, the price falls. Keep in mind the percentage share of China in terms of demand for these goods. Fall in demand from China would cause madness all over. Basically, because of China’s huge demand for these commodities, it has a large impact on the pricing of these goods.
Any rise or fall in China’s consumption will affect the global prices of these commodities. Because, if China stops importing these,
How much do countries depend on China for money (loans)?
Heard of the term ‘Debt trap Diplomacy’?
When a country tries to gain power over poor countries by lending money to them under harsh conditions, often with an intent to gain power over such countries.
Turns out Chinese Banks are not just lending out to Chinese companies, but to other countries too.
Often, developing nations are lured by China’s offer of cheap loans for infrastructure projects, which require heavy investment.
Why would China offer cheap loans to other countries?
Well, what happens is, these developing nations, which are primarily low or middle-income countries, would not be able to keep up with loan and interest repayments. Hence, they would approach China for debt relief.
China then pounces on this opportunity to DEMAND advantages in exchange for debt relief. For example, Sri Lanka was forced to hand over control of the Hambantota port project to China for 99 years, after it found itself under massive debt owed to China.
It’s just a well thought, strategic plan by the Chinese government!
China has invested lots of money this way in smaller countries like Pakistan, Angola, and various other sub-Saharan countries. These countries are already under a huge debt crisis (and they primarily owe their debt to China).
China has granted loans of more than $153 bn to Africa between 2000 and 2019. If Africa is a school, China is the trustee on whose money the school runs. If the trustee loses all his money, the school faces a jolt.
7 countries in the world owe more than 25% of their GDP to China. The following chart shows how much the countries are indebted to China:
In case the Chinese economy falls, these countries would also apparently fail.
Now you realize why we keep saying everything is connected?
How much does China export to other countries?
China is one country that is heavily dependent on the income generated by exporting to other countries. After all, it's the world’s largest manufacturer and exporter of goods. Other countries, on the other hand, are also heavily dependent on Chinese exports. Well, simply because Chinese products are dirt cheap.
Many countries are now trying to ban the import of Chinese goods, because of China’s trade practices, border conflicts with India, tensions at the South China Sea, pandemics, etc.
Assuming that does happen, who will Chinese companies sell their products to? Where would China get money from? Yeah, it would be selling its products to its citizens. But that just means that these Chinese companies would be producing much more than they can sell (excess capacity).
But what about the world economy? Can it afford to ban Chinese goods?
Not really.
The level of infrastructure that China has built over the years (again, in it’s race to become the largest economy in the world), making use of its cheap labour, land, and other resources, cannot be achieved by any other country so quickly.
Truth is that China has other countries right where it wants them to be. If countries decide to ban Chinese products, they’ll have to set up domestic industries, which entails huge costs. The price of the goods, which earlier used to be imported, will then increase in the domestic market which would ultimately lead to a rise in the general price level of goods, hence, inflation.
This entire web of imports, exports, and loans place China in a position of prominence. If this intricate web collapses, what will happen?
Will the world economy crash?
China is known for its ability to save its banks from going under. It is a country where everyone and everything is controlled by the Government. And China can very well do it again.
The Chinese government can technically keep on printing money and bailing out businesses. What would happen is the growth of the economy would slow down, unemployment would increase, per capita income would go down and restlessness would go up.
The smaller countries that are indebted to China would suffer. The larger countries that relied on China for cheap imports would suffer. Commodity prices would crash.
The other two biggest markets are the USA and the Eurozone. But over the past decade, these two economies were not even close to the growth rate of China. If China collapses, there’s no other country left that can prevent global stagnation.
When China sneezes, the whole world catches a cold.
All we can do is wait and watch what course the Chinese economy takes and what the future holds for us.
Until next time...
Share this with your friends on WhatsApp and Twitter!
If you are coming here for the very first time: Don’t forget to join us on WhatsApp to get daily updates! 👇