China’s Banking Sector Risks and Implications for the United States

Banks are the dominant players in China’s financial system, but they are also a source of systemic risk as China’s growing debt burden is concentrated on their balance sheets. While Chinese banks appear similar to their U.S. counterparts, there is a key difference: they remain beholden to and supported by the state. This makes them operate in fundamentally different ways than U.S. banks. Despite four decades of promised liberalization, the Communist Party-state retains the ability to intervene decisively in the banking system to achieve desired outcomes. However, the government’s efforts to control and direct the financial system have also limited the growth of direct financing channels such as stock and bond markets, leaving banks as the main providers of credit in China’s economy and, thus, indispensable. Beijing has consequently been forced to bail them out on several occasions