China's property crisis continues to put the country's and the region's economy under strain, prompting banks and regulators to act to prevent what appears to be an imminent bank run.
Recent developments in China's financial sector have raised concerns among citizens, especially now that Evergrande has fallen, along with that of Country Garden, two of the largest real estate banks in the Asian giant. Although the Chinese government has pledged to step up risk monitoring and disposal of bad assets for small banks in trouble, the threat is such that small banks are now in a highly precarious situation and on the verge of what appears to be a bank run.
The Chinese government's solutions, while sending a message of reassurance, the reality is that urban commercial banks and rural financial institutions are seeking to shed bad assets and loans while replenishing their capital through multiple channels. A complete bank reorganization increases the risk of triggering a run, should any of these entities be unable to carry out such actions and thereby burst the huge Chinese property bubble. In fact, the authorities are so aware of this that they have already banned banks from operating outside their designated economic regions.
Recall that the phenomenon known as a bank run occurs when a large number of depositors (or financial institutions) simultaneously withdraw their funds from a bank, often driven by fears of the bank's insolvency. These events can have significant repercussions for the broader economy, potentially triggering a liquidity crisis and undermining public confidence in the financial system.
Understanding the underlying factors
The recent bank run in China can be attributed to a confluence of factors, including the economic slowdown, concerns about the health of the real estate sector, and regulatory crackdowns on certain financial institutions. These factors have collectively eroded public confidence in the financial system, leading people to safeguard their savings by withdrawing them from banks.
In the face of these risks, China's official response is: mitigate risks and restore stability to the financial sector. To this end, Chinese authorities have taken several measures to stabilise the financial system and prevent contagion. Measures ranging from reassuring the public that the financial system is safe, to strengthening regulation with new regulations (such as not being able to operate outside their designated economic areas), but above all, having the People's Bank of China (PBOC), the country's central bank, inject liquidity into the banking system to ensure that banks have sufficient funds to meet withdrawal demands.
How much liquidity are we talking about? No less than 790 billion yuan (about 108 billion dollars) to maintain adequate liquidity in the banking system. In this way, China seeks to maintain economic stability, achieve its growth projections and avoid an economic slowdown.
However, experts say the People’s Bank of China (PBOC) is walking a tightrope between maintaining enough liquidity to help a struggling economy and stabilising the yuan amid expectations of “higher for longer” US rates. If the move continues, and coupled with instability in the real estate sector and the financial ecosystem around it, the PBOC’s move may end up accelerating the inevitable, while negatively impacting the value of the yuan.
Need for refinancing
The PBOC's move is compounded by the need for refinancing as many local Chinese governments, including Liaoning and Chongqing, rush to issue special refinancing bonds to pay off their outstanding obligations, while Beijing steps up efforts to reduce rising debt risks that remain a concern for investors.
In light of these developments, experts say the PBOC may end up issuing at least 1,5 trillion yuan (about 205 billion dollars) before the end of the year. This is driven by unrealistic cuts in interest rates that encourage cheap borrowing, which has led to the real estate crisis.
At the same time, the government is seeking to maintain monetary stability to sustain its economic fight against the United States. Hence, the PBOC's measures seek to maintain some flexibility without widening China's performance gap with the United States, putting further downward pressure on the yuan, which has lost about 5,5% against the dollar this year.
Unusual measures
However, the skyrocketing need for refinancing in China and rumours that other financial and banking institutions are already in trouble have not calmed the population and investors. In fact, actions such as those of Cangzhou Bank, one of the largest in China and one of the 1.000 most important banks in the world, have only fuelled fears. Recently, the bank has decided to take a rather unusual measure to "calm down the mass withdrawals that have taken place in its institution in recent days": display a huge pile of banknotes at the entrance of the bank.
A bank representative said:
People have been queuing up for the past two days. We can only let them withdraw it, but there is nothing we can do. In fact (the bank) has enough funds.
The trigger for all this is that Cangzhou Bank is one of the banks affected by Evergrande's bankruptcy. In total, the bank lent Evergrande more than 3 billion yuan (about 410 million US dollars), and the bulk of the bank's assets are real estate (about 42% of total assets of 237 billion yuan, about 32,4 billion US dollars), of which the majority are Evergrande's unfinished properties.
Similar problems have also been reported at Zhongzhi Enterprise Group, one of China’s largest private wealth managers with more than $137.000 billion in assets under management. While it was unclear how many products Zhongzhi had defaulted on, it suspended payments on nearly all of its products in mid-August 2023. The firm hired KPMG to review its balance sheet, while China’s banking regulator set up a task force to examine the risks.
Impact on the crypto sector
Although cryptocurrencies are banned in China, there is no doubt that the impact of this financial crisis in the Asian giant will have strong repercussions in the crypto world. In the country there are not only local investors, but also from South Korea, Singapore, Hong Kong and Japan, many of whom could use cryptocurrencies as an exit vehicle in the face of the strong capital controls imposed in China. Let us remember that although cryptocurrencies are banned in China, this country alone has a market of more than 86 billion dollars in the crypto sector.
If a bank run were to begin in China, we could see strong buying pressure in the region, which would gain bullish momentum and then we would see a strong correction due to selling pressure from those who have used it as a vehicle to exit the crisis. Despite everything seen, there are still many things to examine and understand in the Chinese real estate crisis, which has been putting this sector and the economy of the Asian dragon on the brink since 2020.
Continue reading: Cryptocurrencies could return to China from Hong Kong, according to Chainalysis
