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The banking system of China, the world's second largest economy, can collapse any time. We are not talking about the situation there. The debt of the real estate sector in China has now taken such a terrible form that it has become a threat to the world's largest banking system. The big challenge is that there is no immediate solution in sight.
Of the total loans distributed by Chinese banks, about 40 percent has been given only to real estate companies. Now this has become a problem for the banks, because there are dozens of companies and real estate developers who have defaulted on loans. China's largest real estate company 'China Evergrande' is currently the world's most debt-ridden company.
This crisis has arisen for many years
The debt crisis of real estate companies in China did not arise in a day or two, rather it has reached this level over many years. One reason for this crisis in China's real estate sector is huge debt. Apart from this, over supply of property and people backing away from the decision of buying houses and other properties are also the reasons for this.
Government will have to give bailout
To deal with this debt crisis that has been going on for many years, the government will have to give bailout packages to banks for many years to come. The Chinese government has also started taking steps for this, such as asking banks to give time to borrowers to repay the amount. Although there is risk in this, but it will help in averting the current crisis a little.
The problem in China is also grave because the government has control over the entire banking sector there. The Chinese government has a stake in every big and small bank.
Banking system will sink
Andrew Collier, founder of Orient Capital, an economic research firm in Hong Kong, says that if China fails to deal with this debt crisis, it will not be able to properly dispose of the bad debts of the property market. So the interest cost will increase which will harm the economy.
At the same time, a lot of capital will continue to be invested in such investments which have no value. Despite such a crisis, no one in China sees any hope of a decline in real estate prices, which could increase demand there. If the situation goes out of control, it will take down the entire banking system, just like what happened after the US recession in 2008.
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