In May, the Chinese government announced it would take control of one of the countryâs failed commercial banks. Now thereâs a second bank that requires a bailout from one of the republicâs state-owned banks. More than the immediate repercussions for the Chinese economy, this spells significant for the global economy at large.
Peopleâs Bank of China Saves Baoshang Bank, ICBC Rescues Bank of Jinzhou
Earlier this year, the state â through the Peopleâs Bank of China â took control of regional lender Baoshang Bank, the first such action concerning a commercial bank in 20 years. On its heels came the latest reports that the government is extending a lifeboat to another regional creditor, the Bank of Jinzhou. The bank holds $100 billion in assets.
China is home to the worldâs four largest banks (by total assets). The countryâs biggest bank is the Industrial and Commercial Bank of China (ICBC). It has been the largest public company in the world by total assets for seven years running. The rest of Chinaâs banking Big Four are also on the top 10 list. In China, banking is big business. State-owned ICBC is the custodian to over $4 trillion in assets and employs nearly half a million people.
ICBC will reportedly pour up to $436 million (3 billion yuan) into the Bank of Jinzhou. An additional two state-owned banks will also invest in return for equity. These banks â China Cinda Asset Management and China Great Wall Asset Management â were set up in 1999. This was done in a bid to deal with toxic assets originating from the Big Four banks.
Chinaâs Banking Ecosystem is a Domino March
For years now, people have been speculating that Chinese banksâ no-questions-asked proclivity to extend credit and grant loans would bring the economy to its knees. Now, coinciding with a trade war with the US in full swing, private Chinese banks are collapsing.
In April, the Hong Kong Stock Exchange suspended Bank of Jinzhouâs shares. The bank failed to publish its annual report, citing âdelaysâ. Their auditor, international auditing firm Ernst and Young, also ended the relationship. In 2015, Jinzhou was involved in a probe by the Hong Kong Securities & Futures Commission into the Hanergy Group. The bank had to postpone its IPO after the energy company it extended a $1.29 billion (8 billion renminbi) credit line to, collapsed.
Jinzhou and Boashang are both on a list of various Chinese banks that delayed disclosure of 2018 financial statements. Of these, the two collapsed banks were in the top 4 of banks with the most assets. Experts feel this may indicate an impending insolvency crisis across the country.
China Learning to Fail is Failing to Learn
China is no stranger to government rescues. Mere days ago, reports released information that another state-owned bank, China Construction Bank, will inject $291 billion (2 trillion yuan) into one of Chinaâs central provinces. The province, Hunan, is infamous for its inability to manage provincially allocated and raised finances.
Over and above the relatively baseless ease with which lenders issue loans, Chinaâs shadow banking sector is another force to reckon with. ICBC itself was embroiled in the failure of Credit Equals Gold #1 Collective Trust Product. Instead of allowing the fund to default, an anonymous third party stepped in to return investorsâ initial investments. This temporarily saved the day but prevented the Chinese market from learning a valuable lesson in investing in high-risk ventures. Clear from this yearâs banking bailouts, the country might be similarly preventing economic evolution by cushioning blows.
Chinaâs Problem is Everyoneâs Problem
China is a relatively young modern economy and is apt to make mistakes more mature markets have already learned from. But China is by and large following the Western economic model of issuing money out of thin air, which eases bailout decisions. The larger issue here is the prevalence of wonky economic practices.
The global economy has not taken on board the lessons from the 2008 market crash and is readying itself for another recession. Weâre spending money we donât have and replenishing our stock by creating Monopoly money. The domino effect will be felt everywhere. China is but one case study. Fractional reserve banking is a tightrope with no safety net. Thereâs not a single country immune to a fall.
Chinaâs current banking events is highlighting that economies are fallible things. In an age where more money is created by switching on the printing press, the finance world is operating on a house of cards.
Do you think these events are harbingers of larger economic catastrophes in China and abroad? Let us know in the comments below.
