An article in the Wall Street Journal in 2016 noted that banks in China have been experiencing problems with business borrowers defaulting on loans and have had difficulty attracting enough deposits to fund new loans.
Source: Anjani Trivedi, “Why China's Big Banks Aren't Looking So Large" Wall Street Journal, May 3, 2016.
Are these problems likely to matter for the future growth of the Chinese economy?
A. No; China's banks have sufficient reserves.
B. Yes; high default rates and the lack of deposits will lead to lower interest rates in China, thus slower growth.
C. No; China has mostly small banks which would not be harmed much by defaults on loans.
D. Yes; banks will have less funds available and will be hesitant to make loans to Chinese businesses.
It has been stated that default on loans by business borrowers is increasing in China and also banks are being not able to attract enough depositts to fund new loans.
Rising defaults will deter the banks from making fresh loans as they would be more circumspect to lend in changing economic and business scenario.
Apart from this, lower deposits will reduce the ability of banks to make new loans even to solvent borrowers.
The combined impact of such scenario is that investment spending backed by credit will reduce in the Chinese economy as there will be lack of credit liquidity.
The decrease in investment spending will reduce the future growth prospects of the Chinese economy.
Thus,
Yes, banks will have less funds available and will be hesitant to make loans to Chinese businesses.
Hence, the correct answer is the option (D).
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