For days, China’s leadership has been preparing its compatriots for a “war” on the new coronavirus, more specifically, for a “people’s war”. “It is inevitable that the new coronavirus epidemic will have a significant impact on the economy and society”, said the Chinese leader Xi Jinping in a televised speech. The main goal now is to mitigate these effects.

Experts expect the government and the central bank to continue to provide massive support to the economy. But this poses a number of dangers – such as excessive corporate debt and even more bad debt in bank balances.

The government has an absolute priority to bring the economy back to growth. The economy of the People’s Republic has almost died down after the New Year holidays in mid-January. This was due to the massive restrictions on the movement of people and goods, which had to prevent the spread of the virus. The number of new infections in the country continues to increase – this Tuesday with a total of 508 cases. So far, over 77,600 people in China have contracted the pathogen.

The longer the crisis continues, the greater the likelihood that unemployment will increase. The first companies have already warned of the possibility of bankruptcy, and important supply chains have been interrupted. However, the Chinese government is firmly committed to preventing higher unemployment, as this can lead to social unrest in the autocratic country.

So it engages the banks with the problem. Lenders are again encouraged to lend more generously to companies – and are even called to be lenient when they are owed, as a representative from the Chinese banking and insurance regulator explained earlier this week. This turnaround is remarkable as it can again increase the proportion of problem loans in bank balances.

In the past, such loans posed a major risk to the Chinese economy. For the past two years, the Beijing government has been trying to control this problem and combat shadow banking.

There were also stricter requirements: financial institutions had to show data on problem loans more transparently, and their share in the total loan portfolio could not exceed a certain amount. The fact that the balance sheet cleanup was not completed was only revealed last year – the Chinese government had to support several banks, raising doubts about the stability of the banking sector.

A major problem in the past was that under pressure from the government, state-owned banks were lending to troubled companies that could not pay their debts. Private companies were abandoned. Iris Pan, an economist at ING Bank for China, believes that Chinese banks are facing an increasing burden.

Unlike Europe or the US, the central bank in China also intervenes more directly in bank lending, explains IfW expert. However, recently the Chinese Central Bank has tried to reduce this direct control of lending and pursue its monetary policy more through interest. In the People’s Republic, however, there is no key interest rate on which all monetary policy is based, but rather different instruments.