China's property industry must repay $20bn of offshore bonds in the first quarter of 2022, twice the level of this quarter. Foreign investors have been quick to grasp the risks
. Because the biggest state-owned lenders prefer to make loans to other state firms, private companies and entrepreneurs have bought stakes in banks in the hope of getting preferential access to credit.calculates that up to 20% of the commercial-banking system may have close links with tycoons or private businesses. There have already been blow-ups. In 2019 the collapse of a small lender caused a spike in interbank borrowing rates; several more failures have followed.
For Xi Jinping, China’s leader, state control is the answer to both the property and banking threats. To keep building sites ticking over, local governments are taking control of some unfinished projects. At smaller banks many corporate shareholders are being forced out and replaced by local-government asset managers.
This reveals the limitations of Mr Xi’s economic philosophy. The expanding reach of state control may prevent a full-blown panic, because it shows that almost all banks are underwritten by the government. But it fails to acknowledge an important truth about the economy. Many of the distortions that plague China’s markets were created by rigid state control. In plenty of private firms, insider dealing with lenders has been a way to cope with a state-dominated banking system that discriminates against them. Mr Xi may succeed in averting a sudden bad-debt crisis by reasserting state authority.
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