The Chinese are in the middle of a bank run and no one cares in the rest of the world

Chinese banks are facing a major crisis.

Atlantic: Local banks in China begins to show signs of insolvency, desperate customers even sparked several protests in different parts of the country. According to protesting residents, banks prevent cash withdrawals. Banks block about $1.49 billion in deposits. How to explain this situation? What state are Chinese banks in?

Michael Ruimy: For several years now, the Chinese authorities have taken a determined stance to clean up the financial sector by encouraging establishments to limit recourse to “shadow banking” (financing of the economy outside the traditional banking system), the development of which had acquired worrying proportions. In this environment, the impact of the strict confinements of recent months, in relation to the coronavirus pandemic, weighs more and more on the economy, in particular on banking activity by affecting the quality of credits (significant increase in doubtful loans) and results (decreasing profits).

Therefore, the state of health of the country’s financial brands is not encouraging, especially since the bankruptcy filing of Boaschang Bank (August 2020), the first liquidation in the nation’s history since 2001, has highlighted concerns about the health of the banking sector. , and more specifically those relating to the many small and medium-sized local banks.

In this context, recently (mid-April), six banks with branches in Henan (4) and Anhui (2) provinces suspended their online banking and mobile banking services for official system upgrade reasons. This situation generated a “bank panic”. Depositors rushed to local bank branches, only to be told they couldn’t make physical transactions, including cash withdrawals, but also from their online accounts, mobile apps and third-party platforms.

Faced with this situation, many Chinese have rushed to the banks, generating a “bank run” phenomenon. Doesn’t the election of certain Chinese banks reinforce the situation of bank panic throughout the country?

Chinese provincials culturally have a certain reluctance/aversion to depositing their savings in a bank. The establishments have been successful in their particular business by guaranteeing their customers’ deposits. However, the difficulties currently going through, more specifically the Henan municipal institutions, have generated great concern among the population, which calls into question the trust they have placed in them but also, to a certain extent, in the State and the control authorities.

Accordingly, China’s central bank issued a statement in late April that it will cooperate with relevant regions to protect consumers’ financial rights. As for the supervisory authority of the banking and insurance systems, it revealed that it was investigating fraudulent activities carried out by the Henan New Fortune Group, the main shareholder of the four banks (misappropriation of public funds through internal and external collusion)… while not mentioning the situation of the two banks in Anhui province.

Is this crisis a sign of the loss of confidence of more and more Chinese in their financial and banking institutions (especially after the China Evergrande scandal)?

Although the strict confinements linked to the health crisis have aroused anger, the most striking phenomenon in recent years has been the gradual loss of confidence of the Chinese in their financial system. In this sense, the difficulties faced by the China Evergrande group, specialized in the construction and sale of residential apartments in China’s second and third-tier cities, have reinforced this distrust, with residents risking losing their savings used as deposits to buy your home.

To restore investor confidence and minimize economic damage, authorities must remove any doubt that they will do what is necessary to contain the potential fallout from an estimated $300 billion Evergrande default.

But three sources of uncertainty could greatly amplify the negative impact on the rest of the Chinese economy. First, a psychological ripple effect on other real estate developers who, like Evergrande, use debt to finance their operations. If potential lenders are concerned about difficulties in real estate, many businesses may find that their financing is running out. These fears of bankruptcies in the sector fuel self-fulfilling prophecies. Then there is Evergrande’s control over the Chinese financial system and over shadow banking. While it is easy to discover and document the extent of corporate borrowing by banks and non-bank financial institutions, the channels and magnitude of the various indirect effects are more uncertain because they are more complex. Finally, and perhaps the most important source of uncertainty, is whether the authorities can avoid a widespread financial collapse if the Evergrande problem turns into a systemic crisis.

Whatever the cause, these developments raise serious questions among the public about the health of China’s financial system and regulatory oversight. However, the most immediate concern is the prospect of contagion, which could see the run (so far) only on rural banks spread to the main cities.

Why is this banking crisis in China, which could lead to a currency crisis, being relatively ignored around the world? Is the Chinese power able to stop the protest of the Chinese in the face of these banking difficulties that prevent the West from seeing the magnitude of the phenomenon?

At a time when the Chinese economy is slowing sharply and when the private sector is severely underfunded, the authorities now face a dilemma. They want to preserve the credibility of their consolidation approach, but they cannot deprive the banking sector of liquidity.

Furthermore, in a context where energy and food problems leading to high levels of inflation are of concern to Western countries and where information on China’s internal situation is blocked, real consideration of China’s economic situation in the Middle Kingdom by the rest of the world has now become secondary but also difficult, not least because the country’s public debt-to-GDP ratio, in 2021, looks much lower (70%) than that of the United States (133%). ), Japan (257%) and France (115%) and would provide the fiscal capacity to face a potential crisis.

But let’s not forget that 2022 looks set to be an important year in Chinese politics. The Communist Party will hold its 20th Congress this fall, during which Xi Jinping is expected to be re-elected for a third five-year term as its leader, the two-term limit set by Deng Xiaoping having been abolished. Therefore, it is necessary, for the plaintiff, to stabilize the growth, to avoid public reporting of any dysfunction, of any challenge to the Company… If, at the end of May, images emerged on social media showing numerous demonstrations In front of the bank agencies, these events were rarely broadcast and/or mentioned in the press.

What are the possible risks of this crisis for the global banking system? What could be the consequences for the world economy if consumption in China and Chinese companies were disrupted by these banking difficulties?

China’s rise as a global economic power has raised concerns that a crisis in China’s banking sector could lead to a global recession similar to the global financial crisis of 2007-2008.

While many analysts thought China’s banking system was largely immune to the Evergrande crisis, the cracks are starting to show. To be sure, the lack of information on the signs of a bank run in China is somewhat surprising and hardly reassuring. If this bank run intensifies, already volatile global markets could face an even bigger “black swan” event than Evergrande.

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