China’s communist government restricts the free flow of information but the little news we are getting show huge banks inside the country are beginning to fail. China’s economic collapse is on the way.
The first Chinese bank to fail was Baoshang Bank. The Chinese government seized Baoshang Bank. It was the first such takeover of a distressed bank in China in more than 20 years.
China’s less than open reporting of what really happened at Baoshang Bank caused panic to spread throughout China’s banking sector. Risk aversion has spread among China’s big banks concerning loans to smaller financial institutions. The interbank market, where banks lend to one another, took a hit, causing cash flow issues for borrowers.
The Peoples Bank of China panicked and injected an incredible 250 billion yuan via an open-market operation which was the largest inject of money into the Chinese market since January 2019. But all the hundreds of billions of yuans pumped into the banking sector was not enough. Rates on Negotiable Certificates of Deposit, bank bonds and assorted report rates exploded higher.
The perceived risk of loaning money to Chinese businesses has exploded higher after the failure of Baoshang Bank, making the situation even worse.
A tell-tale sign that Baoshang Bank was about to fail was the fact that the company had delayed publishing its annual report.
As China’s economy continues to move closer to an economic collapse, more and more banks are delaying the publishing of annual reports.
Now, Bank of Jinzhou appears to be on the verge of collapse. This bank is 40% larger than Baoshang Bank in terms of total assets.
Many interbank institutions have blocked Bank of Jinzhou as a counterparty because it’s on the verge of collapse. This has caused a liquidity crunch at the bank. According to Reuters, the Chinese government recently met with the Bank of Jinzhou to discuss how they can fix these liquidity issues.
Last year, about 18,000 companies filed bankruptcy petitions with Chinese courts and this is almost twice the number that was recorded in the previous year. The number of defaults on bonds also hit a record high last year. Current data shows that the default rate is 500% higher than the number recorded in 2015 as China heads for an economic collapse. Keep in mind that this data is faked by the communist government so the real picture is much worse.
You might be wondering how Chinese banks can be failing when the GDP of China is at 6.2% or more than double the U.S. The answer is that China has much higher corporate debt than U.S. companies. Corporate debt in China stood at 155% of gross domestic product at the end of quarter one 2019 which is much higher than other major economies.
China’s interbank market almost completely froze in June 2019. It was therefore only a matter of time before other banks reliant on it for funding threw in the towel like the Bank of Jinzhou.
You would think that U.S. banks would reduce their exposure to China, but they are not. China is now American banks’ largest emerging market exposure. U.S. banks’ direct Chinese exposure presently stands at $110 billion dollars, a 230% increase over the last 10 years. However, secondary or indirect exposure to the Chinese economy is much, much larger.
Maybe the U.S. tax payer scam this time around will be to blame President Trump’s trade wars for U.S. bank failures and so they need to be bailed out again by tax payers. This is why banks are still speculating recklessly in China: they know the U.S. tax payer will bail them out if their risky speculations fail.
Chinese authorities sharply raised domestic interest rates a couple of years ago. That opened up a huge gap between U.S. interest rates, which are around 2.2% in the U.S. versus 4.5% in China. It became very profitable for banks in the U.S. to loan China money. Many large U.S. banks make commodities-based loans, where the loan is secured by raw materials. Last year, banks around the world lent $687 billion to commodities-based businesses inside China. JPMorgan was the top U.S. lender worldwide, at $57 billion, followed by Wells Fargo which loaned out $47 billion. These loans are not being factored in the estimates that Fitch and others have put together to calculate U.S. banks’ exposure to China. Commodities loans are often structured as derivatives or swaps. Fitch says its China loan estimates do not factor in derivatives or guarantees.
Many U.S. banks may not even realize their own exposure to China. For example, a recent Citi loan ended up sending money to China by way of the Qingdao port was made to Swiss commodities trading firm Mercuria. The commodities that Mercuria used to finance the loan were stored in Qingdao, on loan from a Chinese commodities company named Decheng Mining.
GuerillaStockTrading is predicting that a bank run will start in China in the very near future. Baoshang Bank’s failure and government takeover led to a sharp repricing of risk for much of China’s banking system. News will continue to leak out of China about how the government is bailing out more and more financial institutions that have liquidity issues. Each time a bank fails in China, there will be a sharp repricing of risk which will speed the failure of still more banks in China. As China’s banking system continues to collapse, it will pull down U.S. banks that have massive exposure to China.
The economic collapse of China has begun.