China’s Looming Banking Crisis Is Hitting It’s Tipping Point
Banking customers in Chinaâs central Henan province can finally breathe a sigh of relief. After having their bank accounts frozen since April, their protests and demands are finally being heard by their local government. Starting July 15th, they would be able to remove up to $7,442 from their accounts.
The demonstrations the locals have been putting on since April have become the largest all of China has seen in decades. These kinds of protests are a rare sight in the nation due to the authoritarian political system, but they arenât unheard of either. When protestors took to the streets of Zhengzhou on July 10th, they were accusing those in power of mismanagement and horrific corruption. With a group of unidentified men attacking the protestors, the protest turned incredibly violent with the police standing nearby and refusing to interfere.
Meanwhile, Chinese authorities are shifting the blame to agree with the protestors and singling out a group of âcriminalsâ in charge of the local banks. The customers of New Oriental Country Bank of Kaifeng, Zhecheng Huanghuai Community Bank, Shangcai Huimin County Bank, and Yuzhou Xin Min Sheng Village Bank all discovered in early April that they were suddenly unable to withdraw their money. Thousands of customers tried to run through the banks after the arrest of Sun Zhengfu who is a major holder in these banks for unspecified crimes, but they were reportedly linked to his bank ownership.
This kind of activity from criminal gangs has been on their radar since criminal gangs reportedly took over these four banks back in 2011. A man name Lu Yi is reportedly at the center of these gangs and was able to attract the investment of depositors across the country by promising unusually high returns. While the banking regulators have promised some of the money will be returned to customers, they would not return money that had been used for criminal enterprises.
These problems in Henan are rumored to be just the tip of the iceberg, as Evergrande, a well-known, but bloated property developer is being targeted for property speculation and unsustainable levels of debt. Given their positions within the banking system, numerous other developers have found themselves unable to borrow funds, for fear that they would over-extend themselves as well. Given how crucial property sales are for the Chinese economy, this crackdown is truly crippling their economy, with rural banks taking the biggest hits.
Gary Ng, a senior economist Asia-Pacific at Natixis recently spoke with S&P Global about the looming financial crisis. âSmall banks are likely to take a bigger hit with more challenges in asset quality due to their higher exposure to real estate and [small and medium-sized enterprises].â Seeing the kinds of problems in Hanan, itâs not surprising to see such panic spreading across the industry.
Michael Pettis, a professor of finance at Peking University has also tweeted his concerns about the current situation. âThe past two decades in China have seen a real estate bubble of historic proportions, along with among the fastest increases in debt ever seen. This means that what is happening in Henan is simply part of a process that has many years to continue before it is resolved.â
With the amount of debt the US has assigned to China, many wonder if their sinking ship could suddenly become the plane crashing into the mountain for the US. While we have strategic stops in place to prevent them from calling all the debt at once, that threat is still very real. Given the spending habits of President Biden on woke issues, Ukraine, and his special funding campaigns, it seems likely that should China try to cash in their chips that the US would be unable to do anything about it, thus sending both countries to war almost immediately.