Four of the five biggest banks on the planet are Chinese

In a new ranking of the world’s biggest banks , Chinese
institutions have grabbed four out of five of the top
berths. The list, created by SNL Financial, is based on
total assets. The bank at the top, Industrial &
Commercial Bank of China, boasts $3.5 trillion in assets
—a loan book worth more than Britain’s annual output,
as CNN notes.
Don’t buy the argument that this is yet more proof of
China’s gathering economic clout. For starters, it’s not
surprising that Chinese banks loan a lot more than
everyone else. China, obviously, is huge. But more
importantly, banks are the engine of credit driving the
Chinese economy, generating more than three-quarters
of its total financing.
What’s really worrisome is that the Chinese banking
sector’s swelling assets aren’t a sign of the banks’
commercial prowess. Instead, they hint at deep,
systemic problems that have put the Chinese economy
at risk for a long, painful stagnation.
It’s no coincidence that all four banks in the top five—
ICBC, China Construction Bank, Agricultural Bank of
China, and Bank of China—are state-owned. They
dominate the collection of deposits, as well as having
privileged access to equity markets. This setup has long
allowed the Chinese government to channel funding to
state-owned or state-affiliated companies, which then
invest in projects that align with the government’s
political and economic priorities.
One such priority was avoiding the effects of the global
financial crisis. While other countries funded fiscal
stimulus packages through deficit spending—bonds and
such—much of the Chinese government’s 4-trillion-yuan
($586 billion) stimulus went through banks. This chart
compares asset growth among the Chinese and non-
Chinese banks on SNL Financial’s list:
The price of the Chinese government’s unusual control
over its economy is debt—including the bank loans that
helped rocket China’s bank to the top of the SNL list. All
told, China’s country’s banks now have nearly 88.8
trillion yuan in outstanding loans—around 50% more
than its GDP.
As the economy slows, their vulnerability to default
rises. That’s not just because ebbing growth makes it
harder for their customers to make money; in addition,
desperate firms are more likely to take big financial
risks.
The Chinese government vows to keep growth aloft.
Paradoxically, this makes a recovery less likely, as we
recently explored . The hope that growth will pick up
encourages banks to roll over loans for customers that
can’t pay them back. The more credit that goes to these
insolvent “zombie” companies, the less there is for
entrepreneurs who need loans to build their businesses.
Profits, meanwhile, go back into paying off interest, not
investing in new factories or hiring new workers. Prices
fall as demand withers, which in turn makes that debt
outstanding more expensive—and therefore even tougher
to pay off. And so the cycle continues.
The problem for Chinese banks is that the government
still depends way too much on banks to power growth.
They have to keep lending. That means Chinese banks
will keep topping the charts for along while yet to come
—and the longer they do, the more worried we should
be.