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Slow, Steady, Cheap, and Painless: Making Sense of China’s Bad Loan Strategy

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Abstract

One of those institutional changes is taking place in the financial system. To execute a deleveraging campaign that began around 2016, Beijing created a new “super regulator” for the financial system while relying on an ongoing anti-corruption campaign to overcome resistance to reform. Weighed down by debt after the global financial crisis, China’s financial system was in bad shape. But predictions of an imminent catastrophe were always off the mark, in large part because virtually all Chinese debt is internal, walled off by capital controls. In this chapter, Dinny McMahon details the methodical and gradualist strategy that Beijing has adopted to “clean up” its financial sector, resulting in progress that has outdone expectations.

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  • DOI: 10.1007/978-981-15-2275-8_3
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Fig. 3.1

(Annual NPLs in billions of yuan, and as percentage of outstanding loans at year-end. Source CBIRC, Chinese media)

Fig. 3.2

(Change in total social financing from a year earlier, compared with change in nominal GDP. Source Wind)

Fig. 3.3

(Monthly change in China’s producer price index. Source Wind)

Fig. 3.4

(Increase in loan loss provisions as a share of pretax profits at major banks. Note Banks must hold impairments on loan losses against NPLs. Impairments reduce profits. In the above chart, the smaller the percentage, the less impact impairments have on profit. A reading of 100% means that, were it not for impairments, pretax profit would be double. Source Banks)

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McMahon, D. (2020). Slow, Steady, Cheap, and Painless: Making Sense of China’s Bad Loan Strategy. In: Ma, D. (eds) China's Economic Arrival. Palgrave Macmillan, Singapore. https://doi.org/10.1007/978-981-15-2275-8_3

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  • DOI: https://doi.org/10.1007/978-981-15-2275-8_3

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  • Publisher Name: Palgrave Macmillan, Singapore

  • Print ISBN: 978-981-15-2274-1

  • Online ISBN: 978-981-15-2275-8

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