China’s National Audit Office (NAO) says state-owned banks have given out a total of 28.4 billion yuan ($4.6 billion) in loans outside of proper procedures and that a number clients “embezzled” a total of 18.4 billion yuan ($2.9 billion) in the past year.
The news comes as the country has been trying to reel in what it considers out-of-control lending, which could create economy-threatening asset bubbles that, if burst, could send China into a much-feared hard landing of rapid economic contraction. If that were to happen, the global economy would be rocked, threatening global economic recovery.
The NAO said Thursday it recovered 22 billion yuan worth of illegal loans and that 693 people have been prosecuted in connection to them. The official Xinhua news agency report announcing the news on Friday was scant on details -- neither banks nor clients were named.
Too many bad loans could end up causing major problems in the country’s banking system, which would have global implications.
"We are not facing a Lehman moment in China right now," Shaun Rein of China Market Research Group told the BBC, referring to Lehman Brothers, the global financial services firm that went belly-up amid the heat of the 2008 sub-prime mortgage meltdown caused by careless lending and a sketchy derivatives market that passed the toxic assets onto unsuspecting investors worldwide.
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Chinese banks had been encouraged to lend to fuel economic growth. The process helped China ameliorate the effects of the global economic collapse caused largely by Western banks, but the process has come with a price, which could be paid with a hard economic landing should asset prices take a dive causing borrowers to default on their loans. This is why Chinese state auditors are trying to crack down on bad lending practices and corruption.