Baoshang Bank: Chicken or Monkey?

Baoshang Bank was seized by regulators on Friday. This was surprising news because China doesn't usually announce a bank failure this way. If you've been paying close attention to China the past several years, you'll remember lots of bankruptcies of trusts, indebted corporations and developers. At every turn, it was cleaned up by the local, provincial and or central government. It was swept under the rug and there was no systemic crisis. At several points it appeared a crisis could unfold, but one never did. The odds that "this time is different" go up as time passes because the credit market keeps growing faster than GD. This time USDCNY is again near 7, the economy is slowing and reliant on a smaller slice of the economy (real estate).

The question many are asking is, essentially, was Baoshang Bank a chicken or a monkey? The Chinese idiom "kill the chicken and let the monkeys watch" is a good description of Chinese justice under various regimes, including this one. A high profile target is taken down publicly to send a message to everyone else. Arguing for the "chicken" here is that the bank's owner is presumed under arrest for corruption. Against is that he was arrested two years ago, a bit late for sending a signal. On the financial side, the bank could be a chicken if the Chinese government is serious about deleveraging and serious about getting shadow banking under control ($1 trillion in new credit in January aside). Against is if you think the economic slowdown and trade war has China leaning away from a strict deleveraging policy.

The National Team was out in force on Monday. The Shanghai Composite gained 1.38 percent, the ChiNext 3.34 percent. Some banks rallied, some slipped.

ZeroHedge has the full doom coverage discussing China's ever present understated non-performing loans, massive credit growth, strict capital controls, etc. etc.

"A Big Wake Up Call": Chinese Bond Market Roiled By First Ever Bank Failure

And with the Baoshang domino now down, and the interbanking funding market suddenly freezing, Friday’s announcement will put shares of other Chinese banks under pressure, according to Sanford C. Bernstein. A Bloomberg Intelligence index of Chinese lenders dropped 0.9% on Monday to a four-month low. Predictably, ICBC, the nation’s largest lender, slipped 0.5% in Hong Kong.

Some tried to put a positive spin on the shocking failure: "Low quality, small regional banks are unlikely to pose systematic risks to the financial system or the operations of the big SOE and joint stock banks," said analysts Linda Sun-Mattison and Jason Li in a note on Monday. “However, the bail out of Baoshang Bank, a rare move by the government, and the involvement of CCB will no doubt heighten investor concerns over SOE banks’ risk exposure to national service."

Translation: nobody knows yet if this bank failure will result in a bank run, even as the market is clearly recoiling from the bail out. If a bank run does indeed materialize, and some of those $35 trillion in Chinese bank liabilities (i.e. deposits) flee... well, not only are all bets off, but Trump can celebrate an early victory in the US-China trade war.

Is this time different? We'll soon find out. If so, it is going to be a 12 to 18 month event in financial markets.

Bloomberg: China's First Bank Seizure Since 1998 Shows Hidden Loan Risk
Caixin: Chinese Government Takes Over Bank Linked to Fallen Tycoon
China Knowledge: Baoshang Bank seized by China’s financial regulators over severe credit risk

The People’s Bank of China (PBOC) and China Banking and Insurance Regulatory Commission (CBIRC) have seized control of Baoshang Bank, a private lender based in inner-Mongolia due to the severe credit risk the bank poses.

The China Construction Bank (CCB) has been entrusted to handle the business operations of Baoshang Bank while under state control. Principle and interest on personal savings in the bank will be fully guaranteed and business will continue to operate normally for the bank.

The takeover comes two years after Xiao Jianhua, the billionaire founder of Tomorrow Holding Group was placed under graft investigation by Chinese authorities with Baoshang Bank being identified as a key piece of Xiao’s business empire.

According to sources, the bank had helped Tomorrow Holdings to raise at least RMB 150 billion worth of funding through shadowy practices such as loans packaged as wealth management products, interbank lending that was received by the Group’s subsidiaries and funds which was obtained by the Group by pledging its stake in Baoshang Bank as collateral.

阿波罗新闻: 金融危机信号？包商银行因严重信用风险被接管

Experts: More and more financial institutions will disappear after the financial clearing

For example, Zhu Zhenxin, an economist at the Financial Research Institute, wrote on May 24 that Baoshang Bank was taken over by the central bank and the China Insurance Regulatory Commission for one year due to serious credit risks. It became the first commercial bank to be taken over by the regulatory authorities in history, and it is also following 2018 2 Another financial institution after the month of the Anbon Group was taken over by the China Insurance Regulatory Commission. With the supply-side reform focus shifting from physical capacity to financial capacity in 2017, more and more non-compliant financial institutions will disappear, and Ampang and Baoshang may not be the end.

Zhu Zhenxin said that in the past decade or so, finance has run too fast, and the consequences are bubbles and risks. In terms of stocks, the scale of financial assets grew at an average annual rate of more than 15%, far exceeding the growth rate of GDP during the same period. In 2009, the growth rate of financial assets in the 4 trillion period once reached 24.1%. In 2016, China's financial assets were about 553 trillion yuan, and the ratio of GDP rose sharply to 740%. In terms of increments, the proportion of China's financial industry's added value to GDP has increased year by year since 2005, reaching 8.4% as of 2016, not only far beyond developing countries such as South Korea (2.3%) and Germany (4.1%), and even More than the traditional financial powers of the United States (7.2%) and Japan (4.4%).

He believes that the result of the expansion of the bubble must be clear. When the financial building collapsed, the upper financial bubble was cleared, and then the underlying financial capacity was degraded. It has experienced two stages since 2015. The first stage is from 2015 to 2017. The core is financial de-leverage, which squeezes out the financial asset bubble. The second phase begins in 2017, mainly due to financial de-capacity, eliminating redundant financial institutions and financial migrant workers.

From the stock market point of view, the 2015 stock market crash made it the first financial bubble to be poked. The Shanghai Composite Index fell from 5178 points to 2638 points, more than 1,000 stocks fell more than 50%, and nearly 100 stocks fell more than 70%. %. From the perspective of the bond market, the bubble broke two steps. The first step was the individual bond default in 2014, which was earlier than the stock market crash, but the real large-scale debt crisis was in the fourth quarter of 2016. Due to the tightening of the central bank's monetary policy, the 10-year bond yield rebounded from 2.6% all the way to 4.0%, a drop of 140bp. At the same time, credit defaults have become more frequent. From 2015 to 2018, there were 162 defaults in the bond market. In 2016-2017, a total of 127 bonds defaulted, including debt bonds and AA+ bonds. In 2014, only six bonds were in default.

Wu Xiaoling, the former deputy governor of the central bank, said, “The best way to eliminate risks is to expose risks and allow financial institutions to go bankrupt.” Many people may have no idea about the bankruptcy of financial institutions, especially that banks are unlikely to fail, but in fact, Whether it is a securities company, a trust company or a commercial bank, there has been a tragedy of bankruptcy.

The most famous non-bank institutions in the bankruptcy are Junan Securities and Guangguotou. In January 1999, Guangdong International Trust and Investment Co., Ltd. filed for bankruptcy due to insolvency, becoming the first bankruptcy case of non-bank financial institutions in China. At that time, it was mainly affected by the Asian financial crisis, which led to the collapse of a large wave of trust companies. The data shows that in 1997, there were 242 trust companies in China, and now there are only 68, and most of them are bankrupt or stopped.

The collapse of the Hainan Development Bank is a typical case. In the 1990s, Hainan’s real estate bubble, a number of credit cooperatives carried out business through high-interest loans, and the assets were insolvent. In 1997, 28 credit unions were merged into the sea, but the sea issue announced that they would no longer pay high interest rates. Some speculators withdrew their funds and withdrew, causing other depositors to run. They queued for withdrawals at sea distribution outlets for two consecutive months. The bad debt pressure caused by the bursting of the bubble finally overwhelmed the sea issuance. On June 21, 1998, Hainan Development Bank became the first commercial bank in China to close down due to the payment crisis.

Zhu Zhenxin wrote that when the prosperity was over, the chickens and dogs were ascended to heaven, and when the crisis was over, the waves were washed. In the past two years, physical de-capacity has brought about industrial concentration. In the next two years, financial de-capacity may also bring about an increase in the concentration of the financial industry. In fact, in the past few years, the merger of small commercial banks has emerged in the banking industry (such as the establishment of Zhongyuan Bank by 13 local banks in Henan). The futures industry has seen a wave of mergers and acquisitions. In the past ten years, the number of institutions has dropped by nearly 30, and the securities industry has also There have been cases of mergers between Shen Wan and Hong Yuan, and this situation will increase in the coming years.

阿波罗新闻: 金言：包商银行—给中国金融业报丧的银行？

On May 24, the Chinese banking industry suddenly flew out of the first black swan, and Baoshang Bank was taken over due to serious credit risks. The rare move of the central bank and the China Insurance Regulatory Commission seems to mean that the systemic financial risks that have been “still immersed in the past” have been overwhelmed by the fire; people have repeatedly shouted “wolves”, this time true. It’s coming. Therefore, there are good people who have compiled a funny advertisement based on their homonyms: “Baoshang Bank – a bank that mourns (contractors) to the Chinese financial industry!”

Financial anti-corruption has worn the pustules of the banking industry?

Baoshang Bank was established in Baotou City at the end of 1998. It is the first joint-stock commercial bank established in Inner Mongolia. It holds 36.89% of the shares of Baoshang Bank tomorrow. The founder of the Department of Tomorrow, Xiao Jianhua, is regarded as the whitest glove of Zeng Wei, the son of Zeng Qinghong, the former wealthy steward of the Jiang Zemin Group of the Communist Party of China. He is also accused of being the former daughter-in-law of the Political Bureau of the CPC Central Committee and the daughter of the central bank. There is an improper interest in Chefeng. Due to the “stock disaster” in 2015, Xiao Jianhua was brought back to the mainland by the Beijing authorities on January 27, 2017 for investigation, which led to the collapse of the pool fish, which made Baoshang Bank suffer. This is also another financial institution that has been taken over by the Anbang Insurance in the financial anti-corruption storm.

Coincidentally, on the evening of May 24, the Bank of Nanjing also issued a notice stating that the directors and presidents of the bank had submitted their resignation reports to the board of directors of the company due to the reasons for the transfer of agricultural work. This is only 5 days from the official release of Liu Shiyu's initiative on the night of May 19. This indirectly confirmed the rumors of Liu Shiyu's falling horse and Nanjing Bank.

Liu Shiyu is from Guanyun County, Lianyungang City, Jiangsu Province. He served in the central bank for a long time, and later served as the chairman of the Agricultural Bank of China. In February 2016, he took the position of the chairman of the China Securities Regulatory Commission, known as the “sitting in the crater”. In 2016, eight commercial banks were listed in the country, and his hometown of Jiangsu had five exclusive shares, and there was a blackout of interest. However, some media also said that Dai Juan, a "debt city one sister" of Nanjing Bank, who was very close to Liu Shiyu, was the fuse of Liu Shiyu's investigation. On February 15 this year, after Dai Juan and others were investigated by the Nanjing Municipal Commission for Discipline Inspection, they issued a number of illegal and illegal information, some of which pointed to Liu Shiyu.

At the beginning of the year, the Central Commission for Discipline Inspection also proposed to resolutely cut off the interest chain of the relationship between “financial crocodile” and “financial ghost”. From April 2017, former Chairman of the China Insurance Regulatory Commission Xiang Junbo was dismissed, and in May 2017, the former Chairman of the China Banking Regulatory Commission, Yang Jiacai, was investigated. In April 2018, Huarong Lai Xiaomin’s “New China Financial Corruption First Case”, and now Liu Shiyu’s initiative Investing in the case, financial anti-corruption has gradually entered a climax.

Liu Shiyu, who was "caught in the demon" and was "caught", was offended by many of the top vested interests of the CCP because of the strong supervision storm that he set up during his time at the China Securities Regulatory Commission. "I can imagine how many people will report it. In this case, Any problem with your own is precarious." It can be seen that the infighting of the CCP's privileged interest groups has reached the level of enthusiasm for your life. With the continuous deepening of the financial anti-corruption storm, more and more “financial ghosts” will be disintegrated, resulting in many banks and financial institutions being taken over.

Will the banks that have been relying on the state of the country go bankrupt?

On May 9th, the news of a “Taihang Village Bank Bank Run” in Jiaocheng County, Shanxi Province suddenly began to pass. After seeing this news, local depositors gathered in the bank to withdraw money from the day to the night. Subsequently, the president disappeared, the county magistrate rumored on the scene, and the rumors were detained.

However, there have been two real bank failures in the mainland. One was during the Asian financial crisis in 1998, because the Hainan Development Bank actually paid the depositors interest at the benchmark interest rate because of high interest rates, which led to a large-scale run-off, exhausting its deposit reserve and the country. After the rescue fund of 100 million yuan, it finally declared bankruptcy. This is also the first commercial bank in the background of the provincial government in China's financial history, which was closed for 49 years after the payment crisis. Since the deposit insurance system has not been introduced since the bank collapsed, the money of many depositors has not yet been honored, and there is no clear statement.

The other time was in 2012, the Shangcun Rural Credit Cooperative in Suning County, Hebei Province was approved for bankruptcy due to insolvency, which was also the first bank in China to officially enter the judicial process and declare bankruptcy. From the closure of the debt crisis in 2001 to the approval of the bankruptcy process in 2010, this process has allowed savers to wait for nearly a decade.

In the past, in the impression of mainlanders, bank savings deposits were the safest, and the state would never let banks go bankrupt. The poor Chinese people used to have no social pension insurance, so many people struggled to save money, and there was a meager interest income in the bank.

On May 1, 2015, the deposit insurance system was officially implemented. In 2016, Zhang Tao, the deputy governor of the central bank, spoke out: What is a stable financial order? Not every institution that protects the financial industry does not fail, and there is no risk; instead, financial institutions that have operational risks or failed operations must be allowed to go bankrupt and achieve the survival of the fittest in the market. Recently, the China Banking Regulatory Commission issued an announcement that the “Regulations on the Bankruptcy Risk Disposal of Commercial Banks” has been included in the legislative project. All this means that the myth that banks do not fall is about to become a thing of the past. Many people find that it is not absolutely reliable to deposit money into banks.

Not long ago, the China Banking Association also issued a "China Banker Survey Report (2018)", 69.3% of bankers believe that "the bank will close in the next three years." On April 2, the National Audit Office issued the audit result of No. 1 of 2019, which showed that some local financial institutions in seven provinces (regions) had high non-performing loan ratio, low provision coverage ratio, low capital adequacy ratio, and cover up. Problems such as non-performing assets.

In the past, the local joint-stock commercial banks that relied on barbaric growth and demolished the east wall to make up the Western Wall, especially in the context of the current downward pressure on the economy and the escalating trade war between the United States and China, it is very likely that there will be a run-up tide. Forced to close the door.

Will depositors' deposits be cashed after the bank closes?

If the bank goes bankrupt, who will protect the money of the people? According to the current deposit insurance system, if the bank goes bankrupt, deposits below 500,000 yuan can be paid in full. As for the more than 500,000, it depends on how much money can be left after the bank's bankruptcy liquidation. It may be possible to get it back, or it may not have one point.

In other words, the deposit insurance is subject to a limit payment, and the maximum payment limit is RMB 500,000. If the principal and interest of all the deposit accounts of the same depositor in the same bank add up to less than 500,000 yuan, the full amount shall be paid; the part exceeding 500,000 yuan shall be compensated from the liquidation property of the deposit bank. In other words, the state no longer saves deposits for depositors in commercial banks, allowing banks to go bankrupt. Once a bank goes bankrupt, depositors' deposits will be compensated by deposit insurance agencies, but compensation has a certain limit. The maximum amount of deposits for depositors in a single bank will be 500,000 yuan, and the deposit portion exceeding this limit will not be compensated.

In addition, if the bank goes bankrupt, your wealth management products at this bank, no matter how much, will not be paid in full. In the event of a loss of deposits, a loss in the principal of bank wealth management products, and a redemption crisis in bank-sending wealth management products, the bank does not accompany a penny.

So, where is the safest place for our money? The sage tells us: "Jun, minister, rich, and noble are born from morality, no virtue, no morals, and no morals." Only by getting rid of the control of communist evil spirits, seeing their lies and deceiving, no longer hold any Fantasy, while returning to traditional morality and paying attention to goodness, will receive God's blessing, richness and virtue, thus preserving the dual wealth of material and spiritual.