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By: Frank Knopers
While European countries are worried about their own energy supply, a banking crisis threatens to emerge in China. The problems arose in April, when four small local banks blocked the accounts of all their customers out of nowhere. The bank run that followed was violently suppressed by the authorities, but it remained unsettled. What followed Large demonstrations against the banks and the heavy-handed intervention of the government. But what exactly happened?
The Chinese government has launched an investigation into Henan Xincaifu Group Investment Holding Co, an investor that appears to have a stake in all the banks that blocked customers' savings. The suspicion is that this organization has collaborated with bank employees to use depositors' money for risky investments. Due to disappointing results, these banks ran into liquidity problems, so they decided to freeze customer assets. As a result, an estimated 400,000 Chinese savers were suddenly unable to access their money.
To prevent the bank run from spreading to other banks and further increasing social unrest, the government has started compensating savers. Last week, account holders with less than 50,000 yuan in their account (about €7,500) already received money back, now the government also wants to compensate customers up to 100,000 yuan (about €15,000). This does not solve the problems, because wealthy savers are still in great uncertainty.
China does have a deposit guarantee scheme of up to 500,000 yuan, but that does not save all savers. It is still unclear whether all accounts are covered by this guarantee scheme. Companies have also run into problems because, for example, the freezing of business accounts means that they can no longer pay suppliers or staff.
China's banking sector has nearly 4,000 small and medium-sized banks, which together have $14 trillion on their balance sheets. From that perspective, the problems at the four local banks in Henan province do not seem so serious, but the consequences could be significant. Confidence in the stability of the Chinese banking sector has come under increasing pressure in recent years. In 2019, the government had to nationalize a bank for the first time since 1998. Small savers got their money back, but wealthy customers didn't.
This banking scandal could therefore have far-reaching consequences. The demonstrations of angry savers are still going on and the government is Increasingly heavy resources to suppress it. Even the army would have been used to put down the protests. This bank run that got out of hand seems like an incident, but it could be a harbinger of more trouble. The Chinese housing market is showing signs of cooling, while many savers have put their wealth into real estate in recent years.
Last year, Evergrande was already in big trouble and since then, many other parties in this market have also been struggling. Tellingly, the bond prices of several real estate developers have fallen since then. have collapsed. A problem in the Chinese real estate market could also affect banks' mortgage portfolios. If more people are no longer willing or able to pay their mortgages, for example due to delays in new construction projects or falling house prices, this can also cause problems for banks.
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
