China: $8.1 trillion in losses in the world’s largest banking system

China’s banking system is the largest in the world, with assets of $70.3 trillion – more than those of the US and the European Union combined. Officially, “non-performing loans” (NPLs) do not exceed 1.52%. However, the reality of the Chinese economy – with house prices having fallen by 23% since 2021, new prices falling for 35 consecutive months and 75-80 million homes remaining unsold – raises serious doubts about the reliability of these figures. In a recent report, Trust Economics contrasts the official Chinese figures with historical real estate crises in other major economies: In the US in 2008, NPLs peaked at 5.6%. In Spain, they reached 13.8%. In Ireland, they exceeded 26%. No major housing crisis has ever produced such low levels of “red” loans as the 1.52% that China is reporting today.

The hidden losses

Applying historical proportions, Trust Economics estimates that the hidden losses of Chinese banks range between $5.5 trillion and $8.1 trillion. If trusts, insurance companies, the Belt & Road Initiative and fiscal costs are included, the total loss to the financial system could reach $8.1 trillion – about 39% of Chinese GDP in the base case. Against this size, the annual profits and provisions of banks cover only $1.28 trillion, while the state recapitalizations to date ($74 billion) are a drop in the ocean.

The “Chinese scam” and GDP

This system hides the losses, while simultaneously inflating GDP. With investments reaching 40% of the economy and the country in deflation, the official growth of “+5%” raises serious mathematical doubts.

A Japanese-style “lost decade”

It is estimated that the Chinese government has chosen the mild adjustment scenario today, which reflects a “Japanese-style slow deflation”: a lost decade, erosion of the yuan in real terms and constant pressure on commodities and global demand. The conclusion is clear: There is the world’s largest bubble. In China, even the “bursts” are state-planned – slowly, quietly and with the bill ultimately ending up with depositors and society. The question is how much longer can this game last and what the global implications will be when the bubble begins to deflate abruptly.