Chinese banks face liquidity crisis

Much has been written about China’s surplus savings. The pile of deposits has been the single most important factor supporting China’s financial stability through more than a decade of reforms and commercialisation. However, the cash cushion has thinned considerably during the past couple of years, according to Fitch Ratings.

This depletion has not yet reached systemic levels, but it is enough to erode asset quality. China’s banking system is increasingly distressed, which is a combined result of excessive lending and a policy orientation that overly relies on credit controls and low interest rates, prioritises the state sector ahead of private companies and savers, and favours forbearance and support over restructuring,...