Several potentially troublesome factors lurk in the background of the Chinese economic picture, but few loom larger than non-performing loans. Singh says a worst-case scenario outlook could be the equivalent of the U.S. savings and loan crisis in the 80s.
Economist Goldstein agrees this is a situation worth monitoring. “China has a big ‘bad-loan’ problem,” he notes. “Many loans are to state enterprises from state-run banks. A lot of paper gets shuffled back and forth.”
Northern Trust Company’s Pressler estimates that currently over 15 percent of loans are not being regularly serviced.
“If you were to view the Chinese banking system under Western [standards], it would be considered an insolvent system,” he says.
Nonetheless, foreign direct investment continues to propel the Chinese economy forward, amid the attraction of low labor costs.
“Foreign direct investment is expanding at a 20 to 30 percent basis,” Pressler says. “Everyone wants to make sure their stuff is produced there.”
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