The Guardian

Beijing, May 16:

China’s banking system faces a mounting crisis that threatens to further destabilise the country’s teetering economy. Speculation is growing that the authorities are preparing to inject at least $65 billion to shore up two state banks reeling under the weight of non-performing loans, where borrowers cannot even afford to pay interest on loans, let alone the capital. This comes just months after Beijing pumped $45 billion into its other two state banks. China is raiding its foreign reserves to prevent a run on a major Chinese bank and smooth the way for a flotation of two of its banks later this year. This, however, looks unlikely given the current state of the sector.

Last Friday’s news that China’s annual rate of inflation in April hit 3.8 per cent - a seven-year high - is increasing the likelihood of interest rate rises, which would further exacerbate the debt crisis. “The problem is very serious,” said Allan Zhang, a former economist at China’s trade ministry and now head of the China Business centre at PricewaterhouseCoopers in London. ‘Chinese banks’ insolvency is an open secret.