Market Insights

Chinese Bank Collapse

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Yet another Chinese bank, Harbin Bank, has collapsed. The bank was unable to find the means to continue operating, so the state has taken control in a $2 billion deal to become the main stakeholder, says Reuters.

The move comes just months after Beijing seized control over another small bank, Baoshang Bank, and took stakes in Bank of Jinzhou. Several other Chinese banks have yet to file their annual 2018 reports, which is a sign that the problems facing Chinese banks are more widespread, according to the Wall Street Journal.

At the end of 2018, Reuters reports, 13.5% of China’s 4,379 financial institutions (mostly rural and smaller institutions) were rated as “high-risk” by the People’s Bank of China in their annual review of the financial industry. That’s up from 10.58% a year earlier.

Bank Failures

Globally, since 2017, bank failures have accelerated in Europe, Central Asia, and now China. This looks a lot like the collapse of British Northern Rock Bank, which was one of the starting points for the 2008 financial crisis. Northern Rock crashed at the end of 2007 with total assets worth $140 billion. The total assets of the failing Chinese banks amount to 3.4 trillion yuan or around $485 billion. That’s 3.5 times the assets of Northern Rock.

The British bank’s collapse set off a domino effect across Europe, which quickly spread to the US, where the fourth-largest investment bank at the time, Lehman Brothers, imploded towards the end of 2008. The global financial crisis had begun. Today, it seems we are reliving 2007 but with 3.5 times the effect.

Chinese Banks Failure

Below is a list of Chinese banks that have delayed their reports because they are failing. Hengfeng, Jinzhou, and Baoshang have already collapsed.

Behind the deep trouble in the Chinese banking sector lies the fact that the Chinese economy is going through rough times that are resembling the situation in the US leading up to the Great Depression. Before 1929, the US was the world’s largest manufacturing power. Then, driven by credit growth and excess production capacity, we experienced a total market collapse.

Today, 90 years later, China is showing similar signs. The economy is slowing down and is inflated with high debt and excess production capacity. At the same time, the Chinese public is having the cost of pork, their main food ingredient, rise tremendously, particularly due to a disease spreading across pig farms, leading to inflation. Meanwhile, the Financial Times is reporting that residents in several provinces are running to their banks to withdraw their savings on rumors of impending bank failures.

People’s Bank of China’s Monetary Policy

The People’s Bank of China had shown interest in cutting interest rates, but inflation stopped the bank from taking action. However, now that banks are collapsing one after the other,  China’s central bank has lowered rates and begun injecting cash into the monetary system, just like our Federal Reserve has repeatedly. Although the Fed increased rates at the beginning of 2019, it quickly reversed its course and has since lowered rates three times and printed more money.

China’s most recent economic data is below expectations: industrial production remained flat, retail sales declined, particularly fixed-asset investments decreased, and property investment showed a decline.

Many analysts see the data as a significant sign of an impending economic collapse. Fixed asset investments (which include setting up new factories and purchasing machinery) have dropped to their lowest in over 20 years. These low numbers mean the economy cannot grow, and when the Chinese and US economies cannot expand, the global economy won’t expand either.

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