Bank Runs In China That Are Not Being Talked About
How bad are things in China?
That is up to debate. However, as we discussed a lot over the past year, things are not rosy for the second largest economy. There are a number of headwinds that can really spread to the rest of the global economy.
When the world's manufacturing center is having issues, it is bound to affect everyone else.
Now we are starting to see massive structural issues that could pose a major problem.
Source
Evergrande Was The First Shot
Remember the coverage that Evergrande got? This was something that reminded many of the subprime crisis in the United States. While it wasn't enough to take out the global economy, it was a warning shot.
Evergrande "suddenly" started to enter risk on defaults. The company was running about $300 billion in debt. Unfortunately, the problem was not limited to just this one entity. It was the entire real estate development sector.
It got so bad people were looking to get their money back on units that were not being completed. Of course, the company could not accommodate that. In the end, the decisions appears for the developers to finish as much as they can while paying debt denominated in YUAN back. Those that were issued in USD are basically facing default.
When something this big starts to unravel, it is going to have an impact.
Good Ole Fashioned Bank Run
China could experience something that was common in the US during the Great Depression. Many banks experienced runs as people did not have faith in the banking system. When confidence is lost, financial institutions have a tough time remaining solvent.
What we are seeing now is mirroring that. While it is not widespread, this is something that has the attention of the PBOC.
So far, 6 rural banks have frozen deposits meaning people cannot get their money out.
They are:
- Yuzhou Xinminsheng Village Bank (located in Xuchang City, Henan Province)
- Zhecheng Huanghuai Bank (City of Shangqui, Henan Province)
- Shangcai Huimin Rural Bank (Zhumadian City, Henan Province)
- New Oriental Village Bank (City of Kaifeng, Henan Province)
- Huaihe River Village Bank (Bengbu City, Anhui Province)
- Yixian County Village Bank (Huangshan City, Anhui Province)
This naturally spurred some protests.
So far, the situation in terms of publicity is being contained. One of the top priorities is to not have this spread. If there is a run on banks across the country, the entire banking system could freeze up.
Then the government might need to implement a bank holiday like happened in the US 90 years ago.
Should The World Be Concerned?
This is a tough question.
If there is a bank run in China, the major issue becomes who has exposure. This is a situation whereby the entire global banking system could see activity freeze up. In 2019, we saw a freeze in overnight lending as banks were unwilling to lend to each other due to the fact nobody knew who has exposure to Deutsche Bank. This send short term lending rates skyrocketing.
It took the Fed entering the market with about $700 Billion daily to provide the liquidity to keep the lending going and interest rates down. If the latter got out of control, money market companies would have blown up.
The interdependence of the domestic banking systems with the global one is undeniable. This means that we could be looking at another instance where a banking crisis results. While it is far too early to call for that, it is worth paying attention to.
If we get something like that, look for a 50% drop in the S&P. Cryptocurrency will also be affected.
Bank runs are never a good thing. They can escalate out of control very quickly.
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I wasn’t even remotely aware of this! Thanks for writing the article - will definitely keep an eye out for further information about this.
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Most are overlooking it.
We are now at a point where a lot of the global question is suffering.
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China is good at containing information within their walls but some would still leak and you managed to show them to us.
It's just sad for people who have been caught up in these "financial collapse" if I can refer to it as such. It's concerning to say the least, I wonder how the world's economy is going to be.
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Without a doubt.
Bank runs in China are signs of a systemic problem. That is much bigger than just financial headwinds. We cannot help but to pay attention to this.
System risk has a tendency to spread far and wide.
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I think we're still pretty early on in everything that is happening myself.
No doubt a Chinese banking crisis would trigger a global banking crisis. I don't think many of us are prepared for that, so I hope it is certainly averted
I am not sure how much a Chinese banking crisis would trigger a global one as much as the fallout within China.
It is the second largest economy plus being the world's manufacturing center. Hence, the fallout would have impact globally, just not sure where.
A banking crisis is not a good thing but China might not affect the US banking system too much. It would hit the US economy though.
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And it creates this domino effect, from global banks it trickles down to national banks then to businesses and consumers, No liquidity, no movement. Everything becomes stagnant.
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Dear @taskmaster4450le , Thank you for article!
Is that where the Bank holiday came from as I have never looked this up before?
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Often governments will instill a bank holiday to avert a run on the banks.
With China's banking crisis, the idea is to stop people from withdrawing money, hoping to cool the demand. This rarely works since it only makes people more fearful.
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Same thing in Australia, aussie banks are about to rug pull the building industry
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Well that is a bit different. Some industries do not merit loans based upon their near term situation. That will actually avert a banking crisis.
Of course, it might be too late an the Austrailian banking system might be screwed. I havent look how close that is to a banking crisis.
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I saw someone else talk about this and I think the strict lockdowns have created some panic this far into the pandemic.
No doubt that there is fear within China on many levels.
This is something governments use to control. Sadly, it is very effective.
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Centralized government are concerned with maintain their power at all costs. Money is the driving factor if they can people poor and worried they will keep their power.
Certainly they want to keep their power. That is what it is all about. We see this playing out everywhere.
It is time to change that. Cryptocurrency offers the alternatives. The bank runs in China could just be the start.
People are going to realize how much the system is suffering. I believe it is due to a lack of money in the system.
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This doesn't look good. So far it seems they are small banks (by looking at their names and seeing they cater mostly to villages and rural areas), but who knows how widespread this is.
That is the problem. Remember, in the US, it was subprime loans that were the problem only to spread.
A banking crisis can come in many forms. One of the big questions becomes the collateral that is backing the banking industry. If that goes belly up, we see major issues.
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