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China’s Slow-Motion Financial Crisis is Unfolding as Expected

It is not surprising that China is now facing widespread financial distress, with more to come as the property sector’s woes emerge within the financial system. A credit bubble of historic proportions that had driven China’s growth over the past decade is currently unwinding, and slowing the economy as a result. Defaults on multiple asset classes, along with failures at banks and other financial institutions, have raised new questions among depositors and investors about when Beijing will finally intervene more forcefully.

Losing credibility has consequences, as Beijing’s long track record of intervention in response to financial stress has been the primary bulwark against crisis, so far. When local government financing vehicles begin defaulting on their bonds, which is highly probable within the next year, Beijing will need to actively manage the crisis, most likely using the central bank’s balance sheet.

Posted August 25, 2022
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