[Editor’s note: This letter was written by Tim Staermose, Sovereign Man’s Chief Investment Strategist]
The Chinese government isn’t exactly famous for its honesty and transparency.
So when the Chinese regulators are starting to openly report trouble in their banking system, it’s time to take notice.
According to the People’s Bank of China (PBOC)’s “2019 China Financial Stability Report,” 586 out of 4,379 Chinese lenders were officially deemed to be “high risk”.
But that overall figure, bad as it is, may be masking the true extent of the problem.
According to the same report, over one third of rural lenders are deemed to be “high risk.” One in three banks in rural China. Hmmm.
And this lack of confidence is beginning to cause bank runs.
Yingkou Bank in Liaoning Province, and Yichuan Rural Commercial Bank in Henan Province, both faced bank runs in early November.
In May, the government took over troubled Baoshang Bank in Inner Mongolia – the first such government intervention to nationalize a private Chinese financial institution in more than 20 years.
A joint bailout by three state-owned financial institutions was also organized for the Bank of Jinzhou in July.
And just recently, the government put together a consortium to bail out Hengfeng Bank in Shandong Province.
It was this latest bailout that put the issue of non-performing loans and bad debts in China’s banking system firmly back on our radar.
The Hengfeng bailout is particularly interesting because:
- Hengfeng Bank has failed to file its financial statements since 2016; and,
- The bank’s past two chairmen were each separately investigated and charged with corruption… the first in 2014, the second in 2017.
All told, the Hengfeng Bank bailout is $14 billion US dollars. That’s just for one small regional Chinese lender.
According to the regulator’s own report, there are another 585 institutions in addition to Hengfeng that are “high risk”. So it’s possible the size of this problem could easily go into the TRILLIONS of dollars.
The Chinese banking system at present completely dwarfs banking systems everywhere else in the world, including in the United States.
The total size of China’s banking system has now reached roughly $40 trillion. That’s more than TWICE the size of the US banking system, according to data from the Federal Reserve Bank of St. Louis.
But perhaps even more importantly, China’s vast banking system is more than three times the size of its entire economy.
So if just a small percentage of the Chinese banking system requires a bailout, the knock-on economic effects will be several times greater.
The government is already telling us that a significant percentage of Chinese banks are ‘high risk’. And we’ve seen numerous instances of bailouts already.
But what we’ve seen thus far may just be the proverbial tip of the iceberg.
If just 5% of the Chinese banking system requires a bailout, for example, that’s the equivalent of nearly 20% of GDP.
20% of GDP is an impossible bailout for anyone, even China.
China remains an important engine of global growth. And any large-scale economic disruption due to a banking crisis in China is almost certain to tip the while world into recession.
We’ll definitely keep watching this in 2020; it’s easy to think that something on the other side of the planet doesn’t really matter… but this is far too big to ignore.
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How many U.S. banks are strong and how many are on thin ice?
My dart is aimed at the “few and many” circle.
Sum ting wong
How well capitalism works in a particular place is directly related to the honesty, and ethics of the people. I have been to many third world countries which practice capitalism, but are still mired in poverty due to the fact that they are unable to run systems effectively upon which capitalism depends.
If the people are unethical and will take advantage of every opportunity to enrich themselves regardless of ethics or morality then capitalism will function very poorly indeed.
China’s people lost much of their morality when they were forced to forget the religious teachings of the past and to adopt communism. Communism instilled mistrust, jealousy, and lack of compassion for others into the Chinese psyche. Systems such as banking must be ran morally in order to exist. As soon as confidence in the banking system is lost, the system collapses as people rush to withdraw their money.
The Chinese government has been using its resources to back banks and certain corporations when problems arise, but even the Chinese government is not powerful enough to prevent a full blown collapse in public sentiment.
It is only a matter of time before China’s loans to build ghost cities and the amount of theft and embezzlement that occur every day will cause their system to completely collapse.
Their ghost cities were built to destroy the rural areas that are more free thinking and do not feel nor see the govt as their provider or protector. They need to surveil them. So they crash their banking systems rurally and bankrupt them. Provide them a low rent or even free ghost city and start anew.
Wonder if they changed any reserve rules like the usa did to cause our 2008 banking collapse. Maybe just maybe they see the benefits of having a dozen banks represent 85% of all capital. Easier to control and dictate to 12 banks vs 5,000. They are taking the usa lead and following tyranny