Over the past week, a Banking catastrophe has unfolded inside China, with FORTY (40) Banks Failing and having to be absorbed by other banks. Yesterday, Jiangxi Bank - a GIANT - went under causing Depositors to storm the bank demanding their money.
China's banking sector is facing a full-scale crisis. In just one week, 40 banks disappeared, absorbed into larger institutions.
Yesterday, Jiangxi Bank of China went under, further escalating the crisis. Video below shows thousands of Depositors storming the bank, trying to get their money --- but it's gone!
China's smaller banks are struggling with bad loans and exposure to the ongoing property crisis.
Scope of the Problem
Some 3,800 such troubled institutions exist. They have 55 trillion yuan ($7.5 trillion) in assets—13% of the total banking system—and have long been mismanaged, accruing vast amounts of bad loans. Many have lent to real estate developers and local governments, gaining exposure to China’s property crisis. In recent years, some have revealed that 40% of their books are made up of non-performing loans.
Bank of Jiujiang, a mid-tier lender, recently revealed that its profits might fall by 30% due to poorly performing loans. This rare disclosure highlights the severity of the situation. The authorities have been pushing for more transparency, but the true extent of the bad debt problem is still emerging. The four state AMCs created to manage bad debts are now struggling themselves, with one needing a $6.6 billion bailout in 2021.
Disappearing Banks!
China’s main way of dealing with small, feeble banks: making them disappear. Of the 40 institutions that vanished recently, 36 were in the Liaoning province and absorbed into a new lender, called Liaoning Rural Commercial Bank, which was created as a receptacle for bad banks. Since it was set up last September, five other institutions have been established to do similar work, with more expected.
The Root Cause: Property Sector Recession
The root cause? China's property sector is in a deep recession. Overextended real-estate developers and local governments have defaulted on loans, creating a cascade of financial instability. Property prices have plummeted, and construction projects have stalled, further straining the financial system.
Hidden Bad Debts and Regulatory Crackdown
Adding to the complexity, banks have been using asset-management companies (AMCs) to offload toxic loans, creating a facade of stability. These AMCs buy bad loans but avoid taking on the credit risks, leading to a buildup of hidden bad debts. The National Administration of Financial Regulation (NAFR), a new banking regulator, has been cracking down on these practices, issuing fines and increasing oversight.
What is Coming?
This regulatory vanishing act will probably pick up pace. S&P Global, a rating agency, reckons it will take a decade to complete the project. While fewer bigger banks are easier to regulate, combining dozens of bad banks only creates bigger, badder banks.
The fact remains that the Chinese economy is in an extended and pretend state. Years of credit-fueled growth has finally run its course, and the result will be. lower growth for China and a negative impact on the global economy. Slower growth of the Chinese economy will, in turn, exacerbate their banking problems too.
This will very likely end in massive liquidity injections, stimulation of the economy, and investors flocking to hard assets.
ANALYSIS
This is not only happening in China; It is all over the world. Crises will happen one after another.
This is why more and more individuals and central banks are trying to hold more hard assets. But, those who hoard gold will also have a hard time as Bitcoin is monetizing gold.
My question is: will China be able to contain this by themselves? If so, then nothing to see here. If not, this will spread, worldwide, fast.
