Canadian Banks

EWC is the Canada ETF. Banks have been outperforming in recent years. In relative terms, RY has done best compared to EWC. CM is the most exposed to the housing market.

Here is residential home prices and RY on the same chart. Prices are down 20 percent from the February 2021 peak. Interesting that it peaked at the same time as ARKK and other speculative stocks.

Banking Failures in Henan Persist

Violent clashes with plain clothes officers on Sunday. People in the videos claims these are actually criminals from triad gangs.

This is a continuation of the story from a month earlier, when everyone across China from parts of Henan were given red codes on their covid passports, sending them all into lockdown, after runs on local banks.

Oriental Daily: 3000存户到郑州银行维权　爆发警民流血冲突

The conflict of depositors’ rights protection broke out in Henan, China. On Sunday, nearly 3,000 bank depositors from all over the country protested outside the Zhengzhou sub-branch of the People’s Bank of China, but were surrounded by a group of police and unknown persons, causing bloody clashes between the two sides.

Many people held slogans demanding the bank to return their deposits, and even wrote "oppose the capriciousness of power, oppose the violent beating of depositors by the Henan provincial government in conjunction with the underworld", "resist the violent treatment of depositors by the Henan police, oppose oppression, and demand the rule of law for human rights.

The depositors (depositors) of Henan Rural Banks were unable to withdraw cash in April. In June, they wanted to go to Henan to retrieve their deposits, but were unable to travel due to the "red code from the sky". The incident has attracted great attention, and the amount involved may be as high as nearly 40 billion yuan (about 26.434 billion ringgit).

That is almost $6 billion in U.S. dollars.

Mass Export of Gold is Akin to High Treason

Sergey Glazyev: Sanctions and sovereignty

We need to complete the de-dollarization of our foreign exchange reserves, replacing the dollar, euro and pound with gold. In the current context of the expected explosive growth in the price of gold, its mass export abroad is akin to high treason and it is high time for the regulator to stop it. We need to introduce a digital ruble as soon as possible, which could be used for cross-border payment and settlement operations, bypassing the banking system that is subject to sanctions pressure. We should hurry up with the creation of our own exchange space and mechanisms for ruble pricing for the raw materials produced in our country in excess. Invite partners in Asia to introduce a global payment and settlement currency based on the index of national currencies and exchange-traded commodities.

Another Chinese Company Says Bank Swiped Deposits

Yicai: China's Sciyon Plunges After Reporting Stolen USD46.3 Million Pledge to Police

Shares of Chinese automation equipment maker Sciyon Wisdom Technology Group slumped after the firm revealed that some CNY295 million (USD46.3 million) worth of its unit's time deposits has been pledged by an unrelated party.

Sciyon's stock price [SHE: 002380] plunged as much as 7.2 percent to CNY12.94 (USD2) intraday. The all-time high for the shares has been CNY43.56, logged in the second quarter of 2015.

The company has reported the case to the local police and the Jiangsu Office of the China Banking and Insurance Regulatory Commission, the Nanjing-based control system manufacturer said in a statement yesterday.

The firm's wholly-owned unit Sciyon Wisdom Energy Investment had CNY345 million of time deposits in the Nantong branch of Shanghai Pudong Development Bank as of yesterday. Some CNY295 million of that is pledged while CNY40 million of the sum is overdue.

The Chinese coverage is at iFeng: 一个月内连续发生两起企业存款被莫名质押？银保监会回应：已进驻调查

At the start of the month it was another bank: Bohai Bank Used Customer Deposits as Collateral, Insider Embezzlement or Bankrupt?

Exit question: is the tide finally going out on China's credit bubble?

Precious Metals and Copper vs Money Supply

I have the charts in terms of both M2 and TOTLL (Total Loans and Leases at commercial banks). I have M2 divided by the commodity because it makes the ratio larger than 1. I have tossed in SPY and QQQ to show how they are opposite to commodities and nearing peaks in terms of money supply. The Nasdaq should fall approximately 80 percent versus M2, a return to the peak ratio of M2/QQQ points to $60 at current M2.

The best looking chart to me is copper vs TOTLL. Held the pattern.

I calculated the implied price of every commodity assuming it reverts to the ratio peak vs M2 or if there's a trendline, tags support (for M2 divded by commodity price). These are conservative targets because it does not assume any growth in M2 and assumes no pattern break. For trendlines, I went out to Dec 2026 (6 years), that's simply my default setting for charts. Not suggesting a timeframe. IF it gets there sooner on a trendline, the price would be higher.

Gold $2525

Silver $67

Palladium $4084

Platinum $4570

Copper $10.88

Caveat to all: ratios can be broken, as the palladium chart shows.

CIRC Chief Discusses Shadow Banking

iFeng: 银保监会主席郭树清：继续拆解影子银行 遏制房地产泡沫化倾向

Guo Shuqing, Party Secretary of the People ’s Bank of China and Chairman of the Banking and Insurance Regulatory Commission, said at a symposium on “deepening financial reform and serving the development of the real economy” hosted by Nanchang Zhongzhi of the People ’s Bank of China. We have done a solid job in "six stability" and made concerted efforts to prevent and defuse financial risks and made substantial progress. The main manifestations are as follows:

The first is to accurately deal with illegal financial institutions and financial groups, and to rectify various violations in an orderly manner according to law; the second is to deal with the risks of shadow banking in an orderly manner and substantially reduce the size of cross-financial business; Activities, and continued to carry out special rectification of Internet financial risks; the fourth is to increase efforts to expose and dispose of non-performing loans in the process of supporting economic restructuring and effectively prevent traditional credit risks; the fifth is to strive to stabilize the overall economy and the leverage ratio of major sectors , Focus on reducing the level of debt ratio of state-owned enterprises; sixth, while resolutely curbing the increase, steadily resolve the risk of the local government's hidden debt stock; seventh, further suppress the financialization and bubble of real estate, stabilize housing prices, land prices and expectations; eight is positive Support small and medium-sized banks to deepen reforms to prevent risks and encourage multi-channel capital replenishment. Nine is to respond to external shocks securely and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

All is Well: Regulators Deny Forced Mergers to Stabilize Banking System

Caixin: China Is Said to Mull Wave of Bank Mergers to Bolster Stability

Chinese authorities are considering a sweeping package of measures to shore up smaller lenders, escalating efforts to contain one of the biggest risks facing the world’s largest banking system.

Problematic banks with less than 100 billion yuan ($14 billion) of assets would be urged to merge or restructure under a plan being discussed by financial regulators, people familiar with the matter said. Local governments would be held responsible for dealing with troubled lenders, with the central bank providing liquidity support if necessary, the people said, asking not to be identified discussing private information.

Later in the day, also from Caixin: Banking Regulator Denies Sweeping Plan to Force Mergers

Zhou Liang, a vice chairman of the China Banking and Insurance Regulatory Commission, told Caixin on Sunday the regulator would instruct some small banks to shrink their interbank businesses and those outside their registered region and industry. But he said it would be impossible to take the kind of comprehensive measures reported.

Pivot Time: Another Bank Run, This Time in Troubled Liaoning

Another bank run, this time in Liaoning. The authorities have arrested people on charges of spreading rumors. After seeing China bottle up its troubles, it's unclear whether China's banking system is finally cracking or whether these are isolated incidents. Chinese culture has more herding than Western culture. A bank run is like a Black Friday sale in the USA, in that the crowd itself attracts more people. However, they are connected by one sure thing: social mood. Rumors of bank runs can happen anytime, but they only become serious when people have a reason to think they might not get their money back.



Sina: 辽宁营口沿海银行遭“挤兑” 回应：现金充足

On the afternoon of the 6th, the official microblog of the Public Security Bureau of Yingkou Economic and Technological Development Zone, the Public Security Bureau of Yingkou Development Zone, issued a notice saying that today’s online rumors of false rumors about the financial crisis in Yingkou’s coastal banks have led to a large number of The depositors went to the bank to cash in, and the staff gathered, causing the normal business order of the bank outlets to be disordered, and the surrounding security environment was unstable. After receiving the police, the Public Security Bureau of Yingkou Development Zone dispatched the police force to the six Yingyingkou coastal banking outlets in the district for security order maintenance, and brought a leading troublemaker suspected of disturbing public order to the Public Security Bureau for investigation. deal with.

　　On the evening of November 6, the staff of Yingkou Coastal Bank Gaizhou Branch said to the news that at present all the outlets of the bank are in normal business operations, and there are still a large number of customers coming to withdraw funds, but the bank's cash is sufficient, "the special period is overtime. Avoid causing panic, let everyone know that they are doing business normally.

Yingkou is a city covered here before. About 18 months ago, the AA-rated port defaulted on its debt.

IICS: Update: AA+ Rated Yingkou Port Defaulted on ￥530 Million, Has ￥78.1 Billion in Debt

Way back in 2014, Liaoning was the epicenter of the real estate bust.

IICS: In Yingkou, Liaoning Unfinished Buildings Stretch For 50 Square Kilometers; Real Estate Graveyard

Later that year, I posted Liaoning Sounds Warning on Chinese Economy

If China's problems a systemic, it isn't surprising to see issues pop up in Liaoning.

FT: China’s small lenders suffer bank runs as economy slows

This week, police in Yingkou, a city of 2.5m people in the north-eastern province of Liaoning, arrested nine residents for posting “inappropriate remarks” on social media that Yingkou Yanhai Bank, a local lender, was in a “deep financial crisis”.

The online comments prompted local residents to flock to the bank’s branches to withdraw their savings. “Everyone says YYB is running into trouble,” said a Yingkou resident. “There must be an element of truth in it.”

Zhuang Bo, an economist at TS Lombard, a research firm, said YYB exemplified the difficulties faced by China’s small lenders that had expanded their footprint by issuing shadow banking products, which could include off-balance-sheet lending, peer-to-peer transactions and credit extended by asset managers.

Quick history lesson

Liaoning suffers from protracted industrial/commodity slowdown that starts in 2011
Liaoning goes all in on real estate development to boost growth
Liaoning real estate model implodes in 2014
Liaoning banks moved into shadow banking, WMPs to fuel growth
Liaoning banks hit a wall in 2018
Liaoning banks are going bust

Yes, Yingkou isn't the first Lianoning bank in trouble. The other was Bank of Jinzhou. It IPO'd in late 2015 as China's last round of stimulus was starting to have a positive impact. As I wrote then:

My curiosity got the better of me when I saw the bank is growing 50%+ yoy. I want to see how the bank increased assets to over 300 billion yuan with only 90 billion in loans. What are these assets? They're listed as debt securities classified as receivables. A look at the notes: wealth management products. The bank, as of June 30, had 90 billion lent out in normal banking and 125 billion lent out through shadow banking. Also from the notes: the average yield on their assets rose from 6.04% in the six months ended June 2014 to 7.80% in the six months ended June 2015.

And then in spring of 2019: PBoC Steps in to Support Bank of Jinzhou

Back in July I wrote China Credit Growth and Risk of Financial Crisis. Nothing has materially changed. Right here, right now, it looks like an important pivot point for the global economy and global financial system. If things progress in the direction of the past 8 weeks or so, then maybe the bank issues is overblown for now. "Trade talks" and the Fed's decision to grow the balance sheet will hit the pause button, at least until the Fed stops increasing its balance sheet in 1H 2020. If this is a pullback within a larger move, the denouement of central bank efforts since 2009, markets will deteriorate quickly given the widespread expectation (myself included) of at least a year-end rally in equities.

Fourth Chinese Bank on Brink After Rumor Spurs Depositor Exodus

ZH: Chinese Bank On Verge Of Collapse After Sudden Bank Run

"Our bank is state-backed, and your money is insured by deposit insurance," one female manager told her, but Ms. Li refused, her confidence in the state's lies crushed.

“We really can’t afford to lose the money,” she said.

The bank run at Yichuan Bank, located in China's landlocked province of Henan, makes it at least the fourth bank that authorities have rushed to rescue this year. It won't be the last.

Sina: 河南一银行储户集中提款 央行分支机构紧急澄

In county-level cities, rural commercial banks (formerly rural credit cooperatives) are the most widely distributed financial institutions, which are crucial to the production and life of local people.

　　On October 29th, the Yichuan Rural Commercial Bank in Luoyang, Henan Province, experienced incidents in which depositors concentrated their business. According to the Beijing News, a queue of tickets for personal business on the Internet shows that a man took a photo with a single number. The platoon number is displayed, its number is 1490, and there are 419 people queued in front. There are many people waiting in line at the bank.

The Chinese article says a woman started a rumor that the bank would go bust:

On the 30th, Yichuan Rural Commercial Bank announced that it was originally a woman who wanted to go bankrupt. Soon after, the police informed that the rumored woman was detained for five days in accordance with the law.

At the same time, the official also announced that the former party secretary and chairman of Yichuan Rural Commercial Bank Kang Fengli (Li) was investigated.

Because of a rumor, savers concentrate on business

However, even after coming in with cash and putting out the message about rumors, depositors were still taking their cash home:

Surprisingly, it did not work in China, as people continued to show up, adamant about withdrawing their funds; the bank run was accelerating, and nothing officials did could halt, or reverse it.

Zhang Yanting, a 51-year-old farmer, decided after several days of trying to pull his money out of the bank that he would keep his account open to collect the few dollars in grain subsidies he receives each year from the government. But Zhang still wanted most of his 13,000 yuan in deposits back.

After hours in line Thursday, the bank cashier handed him a wad of cash, which he happily stuffed into his bag. Zhang was unmoved by the promise of gifts, save for a bottle of water that he sipped from while waiting.

“I’ve been with the bank for 10 years and have never seen service this good,” he said.

RRR Cut? Buy A-Shares! But Don't Stay...

The past 6 of 10 times stocks risen following an RRR cut. Traders may not want to stick around though. The only RRR cut of the past 10 that was bullish for an extended period was in February 2016. The other 9 cuts all came during a bear market.

CNstock: 前10次降准后，大盘6次上涨，“牛市旗手”建议优先配置这两个板块！

Third Bank Failure in China: Hengfeng

The takeaway: smoke is increasingly revealing fire in China.

SCMP: Unit of China’s sovereign wealth fund takes over Xiao Jianhua-linked HengFeng Bank in third case of nationalisation since May

China’s sovereign wealth fund has taken over HengFeng Bank, a troubled lender linked to fugitive financier Xiao Jianhua, in the third case in as many months of the state exerting its grip over wayward financial institutions.
Central Huijin Investment, a subsidiary of the China Investment Corporation that acts as the Chinese government’s shareholder in the country’s four biggest banks, has emerged as a strategic investor in HengFeng, according to a brief report overnight by Shanghai Securities News, published by state news agency Xinhua.
The investment was a breakthrough in HengFeng’s debt restructuring led by the Shandong provincial government, the state-owned newspaper said, without citing a source or providing financial details. Huijin’s investment would increase HengFeng’s capital adequacy, improve the troubled bank’s management and enhance its operational capability, the paper said.
HengFeng, based in Yantai city, was founded in 1987. It operated 18 branches and 306 sub-branches across the country. It is among more than a dozen city-level and rural lenders that had been put on notice by the authorities for a shake-up, as regulators step up their programme of cleaning up financial malfeasance and profligate lending.

财新: 恒丰银行重组方案获批 山东省与汇金联手注资详情

According to many sources of Caixin reporters, the non-performing assets divested by Evergrowing Bank are over 100 billion yuan, which can release some risk capital “return blood”. According to the 2016 annual report of Evergrowing Bank, the bank's total share capital is 11.194 billion shares, and the net assets per share is 5.6 yuan. The total assets are 1.2 trillion yuan, the loan is 430 billion yuan, and the non-performing rate is 1.78%. The annual report was audited by ShineWing Certified Public Accountants and a standard unqualified audit report was issued. However, the annual report that has been delayed for two years shows that the book data of the above-mentioned disclosure of Evergrowing Bank is seriously untrue.

Caixin: Another Lender Gets State Lifeline

Hengfeng Bank is no stranger to scandal. Two of Hengfeng Bank’s former heads have come under investigation for alleged embezzlement. The bank also failed to disclose its financial reports for two consecutive years through 2018.

Hengfeng Bank had 1.2 trillion yuan in total assets at the end of 2016, according to its annual report that year, the most recent one it released.

Only a month ago, Hengfeng's HQ was moved to the provincial capital. See: Hengfeng Bank Falls Under Regulator Scrutiny, HQ Moved

It has been embroiled in scandal.

Here's a 2017 post that mentions the bank in passing as one of many involved in "fake seals" scandals, where bank employees use fake bank seals to engage in fraudulent or outside regulation lending.
3 Billion Yuan Fake WMP at Beijing Branch of Minsheng Bank

Hengfeng bought some fake bills back in 2016: ICBC 2 Billion Yuan in Fake Electronic Bills

The scheme unraveled when Hengfeng Bank (HFB), a provincial lender in Qingdao that had bought some of the slippery bills, learnt during an internal inspection in early August that the Bank of CTS has not authorized ICBC to issue bills on its behalf. HFB had suspected the bills because the Bank of CTS reported much higher yields than the market price, one of the bank's employees said.

9 Rural Commercial Banks Downgraded

Last week, Reuters: China banking regulator will study ways to restructure high-risk rural commercial banks

China’s banking and insurance regulator said on Thursday it will study market-based and law-based ways to restructure and reform high-risk rural commercial banks.

It will also invite commercial banks in good standing and qualified investors to participate in mergers and acquisitions (M&A) and restructuring of those rural commercial banks, the China Banking and Insurance Regulatory Commission (CBIRC) told Reuters in response to questions about risks facing the sector.

This week, 财新： 潮水退方知谁在裸泳：九家农商行被下调评级
"Only when the tide ebbs can one know who is swimming naked: nine rural commercial banks have been downgraded"

At the end of July, China Chengxin International Credit Rating Company lowered the ratings of Shandong Yucheng Rural Commercial Bank , Jilin Changchun Rural Commercial Bank , Jilin Changchun Development Agricultural Commercial Bank , Shanxi Pingyao Rural Commercial Bank , Guizhou Renhuai Maotai Rural Commercial Bank , Henan Yichuan Rural Commercial Bank , and Shanxi The rating outlook of Yuncheng Rural Commercial Bank and Shandong Yantai Rural Commercial Bank was negative; Shanghai New Century Rating Company lowered the rating of Jilin Luhe Rural Commercial Bank ; Oriental Jincheng Rating Company lowered the rating of Shandong Jixian Rural Commercial Bank ; Joint Credit Rating Co., Ltd. Downgraded the rating of Guizhou Wudang Rural Commercial Bank .

　　At the same time, so far, Sichuan Chengdu agricultural firm , Shandong Zouping Nong firm , Guangrao agricultural firms , Shandong Bo agriculture firm , Panzhihua City Commercial Bank , Bank of Jinzhou , Prudential Bank failed to disclose the 2018 Annual Report, that the rating agencies Failed to issue a tracking rating report.

No surprise: the banks are in trouble for non-agricultural loans. There is one bank with a spike in NPLs as farmers jumped onto soaring fruit prices (See: Fruit Freedom! Premier Li Discusses Fruit Prices, Analysts Forecast Relief After July):

Among the nine rural commercial banks that were downgraded, except for Henan Yichuan Rural Commercial Bank, most of the rating agencies described the reasons for the rise in non-performing loans of rural commercial banks, which were not related to agriculture. According to China Credit, as of the end of 2018, the rate of non-performing loans of Henan Yichuan Rural Commercial Bank increased by nearly 3%, partly because some farmers followed the wind and blindly invested in farms and fruit growing industries, resulting in operating losses due to backward technology and management abilities. It is difficult to repay the loan.

There's also some fraud cases involved:

The two businesses, one is the big bill case of the branch of Wuchang Wenchang Road, Gansu Branch of the Postal Savings Bank . In this case, the Post Office Wenchang Road Sub-branch did not issue inter-bank financial management qualifications, but in the name of the above-mentioned branches, it issued inter-bank wealth management with the notes as the underlying assets, and Jilin Luhe Rural Commercial Bank purchased 3 billion yuan. When the wealth management products expired, the mail storage Wuwei branch discovered that there was no record of the purchase of the Weihe Rural Commercial Bank, and it could not be redeemed. The case was issued (see Caixin.com, "The Bank of China’s Bank of China’s 7.9 billion bills was punished by the Banking Regulatory Commission. Bank 295 million"). According to the New Century Rating Report, Jilin Luhe Rural Commercial Bank has purchased the wealth management products of the Post Office Wenchang Road Sub-branch eight times since 2016, with a total of 3 billion yuan and a 5% interest rate with a term of one year. At present, Jilin Luohe Rural Commercial Bank has filed a lawsuit against the Postal Savings Bank through the channel . The case is under trial and the bank has not made provision for this asset.

And finally, our old friend the imploding daisy chain of credit guarantees makes a reappearance:

Another example is Shandong Yucheng Rural Commercial Bank. As of the end of March 2019, the bank’s NPL ratio was 8.53%, the concern loan rate was 11.33%, and the “problem loan” accounted for nearly 20%. According to China Chengxin, due to the impact of macroeconomic downturn and tightening of environmental protection policies, the local textile, sheet metal processing, wine packaging, machinery processing and other industrial enterprises have slowed the collection of accounts receivable, and the cash flow has obviously tightened. The conduction effect of the guarantee circle is superimposed, and the rebound pressure of non-performing loans continues to increase. “When the focus loan customers are operating normally, the risk of the guarantee circle is still down to the possibility of being bad.”

Although I doubt the credit guarantee will take center stage this time, it was at the heart of the prior credit downturn. Businesses in a given geographic area, often a city, mutually guarantee each others' loans from banks. Even without excessive leverage, the risk of a localized slowdown threatens to collapse this chain of guarantees. Firms also sell credit guarantees cheap because they assume the government won't let companies default. Layer on high leverage throughout the economy, often borrowed privately/illegally. It only takes one firm to have a crunch and the bank calls the loan, and it's a citywide credit crisis. Links to prior coverage are below.

April 2014: Rumored Mass Death of Companies in Xiaoshan District of Hangzhou If Banks Collect on Debts; Government Tells Banks to Sit Tight or Leave
June 2014: Credit Guarantee Firms Go Down Like Dominoes

This quote sums up the situation (and does this not bring to mind AIG): "The profit model is an important reason for the large-scale collapse of credit guarantee firms, a 2% profit is not sufficient for taking on 100% of the risk."

July 2014: Credit Guarantee Firms Continue to Implode, Private Bonds Default
July 2014: Largest Privately Run Credit Guarantee Firm in Sichuan Goes Bust

August 2014: Wenzhou Tries to Restructure Credit Guarantee Firms; More Than ￥50 Billion in Bank Loans At Stake
August 2015: More On Hebei Credit Guarantee Collapse; 3 "Invisible" Trusts Also Involved
November 2015: Daisy Chain Explodes: PE and Trust Funds Default Due to Hebei Credit Guarantee Default
This 2015 post has lots of links to other credit guarantee stories: The Credit Dominoes Are Falling Again; Northeast Faces Deflationary Collapse Without Bailout

China Credit Growth and Risk of Financial Crisis

For many years I've been covering China's credit risk and the potential for a yuan devaluation. Back in 2011, when many companies were pouring capital into expanding natural resource production in anticipation of never-ending Chinese demand, I discussed how China was not planning a stimulus to boost demand. It was openly reported in Chinese media, but Western media stuck with the China-bull narrative.

Yuan depreciation/devaluation began as an academic exercise, to rebut the claims of China's currency taking over the world. As the case for depreciation began accumulating, I argued the yuan's most likely path was down. The depreciation of August 2015 was no surprise. I expect much more depreciation before the larger credit cycle completes (in contrast to the ~3 year cycles that began in 2008, 2011, 2015 and 2018).

The crux of the issue has always been China's credit growth and its ability to avoid a credit crisis. I believe they will not allow deflation and default, and instead create more credit that will be made possible by or cause a depreciation in the yuan. I have been wrong on timing because China has been able to defend its currency with draconian capital controls, but those controls are evidence that there is sustained depreciation pressure (outflow pressure) on the currency.

While China does print its own currency, it's citizens do not fully trust it. The yuan is not freely convertible on the world market. Rightly or wrongly, it's perceived value is highly tied to its FX reserves. China devalued the yuan in 1994 following a long period of high inflation. The financial system is still fundamentally tied to the US dollar. Until reserves peaked in 2014, China could let rising exports and dollar inflows provide liquidity for its financial system.

The U.S. dollar is at the center of this story because it is the global currency. When the U.S. dollar is depreciating, commodity prices rise. Agriculture and resource extraction enjoy booms. "Emerging" economies more reliant on those sectors boom. Capital flows in, their currencies rise, their financial and real estate sectors boom, and demand for Chinese imports surges. Chinese Belt & Road investments are profitable. If instead the U.S. dollar climbs higher, the entire system can run in reverse. A U.S. Dollar Index (DXY) breakout above 100 indicates deflationary pressure. If one or more dominoes tip over (the euro, a substantial emerging market currency, global trade, debt defaults anywhere), DXY could run to 110 or 120. Or vice versa. The global economic system does not anticipate a strong dollar and most companies and investors are betting against it.

Which is why I always have the caveat when speaking of China, that a major cyclical peak in the U.S. dollar, an end to the bull market, could alleviate much of the pressure on China's economy. On the flip side, a higher U.S. dollar driven by global deflationary forces could be the thing that causes something to break in China.

And now there are reports that Bank of Jinzhou is ready to blow. ZeroHedge has the hyperbolic headline:

ZH: Chinese Bank With $100 Billion In Assets Is About To Collapse

Reuters: Regulators in China discuss liquidity issues at Bank of Jinzhou - sources

Officials from the local branch of China’s central bank and other regulators recently met financial institutions in Liaoning province to discuss measures to deal with liquidity problems at troubled Bank of Jinzhou , sources told Reuters.

Bloomberg: China's Embattled Jinzhou Bank Courts Investors as Bonds Tumble

Bank of Jinzhou Co. said it is in talks to introduce strategic investors after a report that China’s financial regulators are seeking to resolve its liquidity problems pushed down the lender’s dollar-denominated debt.

Reuters: China Bank of Jinzhou says in talks with possible investors, renewing contagion worry

For full context, in 2014 I posted Liaoning Sounds Warning on Chinese Economy. In short, Liaoning (and the rest of Northeast China) relied on commodity production and related industries such as steel. As these sectors peaked around 2011, Liaoning began relying on real estate investment. By 2014, this model also reached its limit for GDP creation. The economy sank into recession and there was a real risk that the rest of China could tip into a major slowdown or crisis. A few WMPs and trust products defaulted. The yuan would depreciate in August 2015. China would unleash stimulus in 2015. By mid-2016, home prices were up 50 percent in some cities, SOEs were buying land hand over fist, and by late 2016 the decline in FX reserves would stabilize amid extreme capital controls.

At the end of 2015, Bank of Jinzhou IPO'd. Rubber Meets Road: Liaoning Bank to IPO in Hong Kong. From an FT piece linked in that post:

Could a banking crisis erupt in China? The commonly accepted answer among western analysts is no, for the simple reason that China has huge State owned banks that dominate the country’s banking industry. But dig a little deeper and a different picture emerges.

It turns out that within China’s smaller cities, the market share of the big banks fades away. Instead, local banks take over.

...In the city of Jinzhou, population 810,000, the state bank share drops by more than half to 19.4 per cent. Most of the slack is taken up by just one bank, the Bank of Jinzhou, with 62.6 per cent of assets.

I wrote:

My curiosity got the better of me when I saw the bank is growing 50%+ yoy. I want to see how the bank increased assets to over 300 billion yuan with only 90 billion in loans. What are these assets? They're listed as debt securities classified as receivables. A look at the notes: wealth management products. The bank, as of June 30, had 90 billion lent out in normal banking and 125 billion lent out through shadow banking. Also from the notes: the average yield on their assets rose from 6.04% in the six months ended June 2014 to 7.80% in the six months ended June 2015.

These WMPs and whatever else is lumped in here, have been driving profits. "Interest income from investment securities and other financial assets" constituted 19.5%, 27.4% and 42.6% of interest income in 2012, 2013 and 2014. Note that they're investing in these products, in addition to offering them. Page 28 lists risk factors associated with these products. As of June 30, 2015, these assets were almost 70% of total assets.

Bank of Jinzhou was operating a similar model to that of Baoshang Bank and many other smaller banks in China: lending in the interbank market, driving credit creation with "shadow banking" products such as WMPs. The risks of this model were well known years ago, to say nothing about where the money was going (such as real estate speculation).

Reuters: Fitch: Boom in WMPs a Key Risk for Some Chinese Banks

The continued rapid growth in wealth management products (WMPs) invested through Chinese banks could be a key source of credit and liquidity risk for certain financial institutions, says Fitch Ratings. The fast rise in WMPs is closely connected with the continuing growth in domestic credit, and they are accounting for an increasing proportion of funding at Chinese banks - especially mid-tier institutions. Recently released data showed the outstanding balance of WMPs rising to CNY23.5trn (USD3.6trn) at end-2015 from CNY15trn a year earlier, with an average of over 3,500 new products issued every week during the year. Nearly three-quarters of these are non-guaranteed WMPs; and over 60% of funds invested in WMPs come from retail investors, attracted by the higher rates of return than that for ordinary deposits. Importantly, they continued to grow faster than bank deposits, resulting in WMPs equating to 16.8% of system deposits at end-2015, up from 13.6% at end-1H15. As a result, banks with large sales of WMPs relative to deposits could face liquidity and funding pressures in the event of renewed market volatility. Fitch believes that the most common source of WMP repayment is through the issuance of new products, resulting in persistent rollover/payout pressure on banks.

The risks are well known, what was needed was the conditions for a credit event.

China doesn't need a major slowdown to have a financial crisis.

Back in 2015, Steve Keen published Get ready for an Aus­tralian reces­sion by 2017. He was off on the timing for the same reason China didn't end up with a crisis in 2017: global central banks were able to kick the can again. The article has a link to excel file which has a simplified debt model created by Keen.

The model combines credit growth with GDP to get total nominal demand. The economy produces a given amount of goods and services each year, and increased credit (from any source) represents additional demand in the economy. As credit grows in relation to GDP, small changes in credit have huge impacts on this nominal demand figure. If credit is 3X GDP, a 1 percent increase in credit creates as much demand as a 3 percent increase in GDP. If credit grows at 10 percent, that's equivalent to 30 percent of GDP. If GDP grows at 5 percent, the total nominal demand is 35 percent of GDP. Credit is 85 percent of new demand. Even a modest slowing of credit growth can have a huge impact on the economy. In macroeconomic terms, it is the failure of speculative finance.

Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt by the non-government sector. He identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.

The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments. For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower" (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat.

If the use of Ponzi finance is general enough in the financial system, then the inevitable disillusionment of the Ponzi borrower can cause the system to seize up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able to cover interest payments. As with a line of dominoes, collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments.

Fitch was warning that WMPs were paid back by new WMPs back in 2016. The Chinese financial system was showing clear signs of trouble. Since then, it accumulated 3 more years of bad debts.

For a U.S. example, here is total credit growth in the US economy (TCMDO) and total loans and leases at banks (TOTLL). Notice credit doesn't crater until well into the recession, when companies are defaulting. It only takes a small drop in growth to collapse the growth rate as speculative borrowers go bust.

When I run the numbers for China, the figure that tips the economy into recession is 9 percent credit growth. China's total social finance (TSF) growth slumped into the 10 percent range in 2019, down from low teens amid deleveraging efforts. Baoshang Bank went bust and Jinzhou Bank may or may not be on the precipice. Caixin: Exclusive: ICBC Subsidiary Will Lead Restructuring of Embattled Bank of Jinzhou

Troubled regional lender Bank of Jinzhou will attempt to restructure by introducing three strategic investors — China Great Wall Asset Management, and subsidiaries of Industrial and Commercial Bank of China (ICBC) and China Cinda Asset Management — Caixin can reveal.

If credit growth (TSF) slows towards 9 percent, there will be a great risk of financial crisis in China. It's possible officials cannot stop natural forces, but if they can, their most likely tool is more credit. Higher credit growth only makes the problem worse though, unless it accompanies much higher nominal GDP growth achieved through higher price inflation. China doesn't want uncontrolled inflation though. The simplest way to achieve a higher price level without risking spiraling inflation is a one-off devaluation in the currency. Exactly what was done in 1994. Or hope for a U.S. dollar bear market and boom in global credit growth.

China Happening or Not

I have spent many years blogging about China's rise and the economic risks within China. I do not believe there is much more to be said about the risk of a credit crisis/currency devaluation in China. It is either going to happen or it isn't. Here's a good summary of how we're again at a crisis point. The authorities will put the denouement off for another day, or the they won't.

Rhodium Group: Beijing’s Credibility and the Baoshang Bank Dilemma

The dilemma is fundamental: Does Beijing want the market to price the risk of potential bank failures, or do authorities want “stable” production of riskier and riskier forms of credit? Beijing can have one or the other, not both.

There's no stable way to switch from non-market to market pricing. You can hide the effects by making the switch after a crisis, but there will always be instabilities. Any system that is controlled for decades will suffer from extreme volatility. If the data is announced, pressure will build in the system as speculators start betting on what will happen once the curtain lifts.

The PBOC’s initial foray in managing the financial stress produced by Baoshang was to send a message that this failure is a one-off related to political affairs—the bank’s primary shareholder was the Tomorrow Group controlled by arrested financier Xiao Jianhua. However, no one knows exactly why this political risk suddenly materialized in late May, and Baoshang’s financial asset profile is similar to many other banks that are in similarly vulnerable positions, particularly under new accounting standards (IFRS 9). Some of these banks are listed and some are not, but larger banks are treating many of them similarly: by reducing the number of banks with whom they are willing to do business.

Because markets quickly started seeing similarities between Baoshang and the Bank of Jinzhou, a listed bank in Hong Kong whose external auditors recently resigned, the PBOC was forced to provide emergency assistance to that bank, effectively guaranteeing its interbank borrowing through negotiable certificates of deposit (NCDs).

Key point:

The PBOC has no history in managing counterparty solvency risks in the interbank market. They just created these risks seven weeks ago. Moreover, the evidence is right in front of us in the form of NCD sell-through rates in the markets, which show that small banks rated AA+ and below are still selling only 20-50% of their interbank NCDs offered in recent auctions, even over the past week (Figure 1), down from 65-75% before May 24. If large banks are comfortable lending to small banks, why won’t they buy their NCDs, which are claims on banks’ creditworthiness?

The kicker:

Beijing cannot restore faith in implicit guarantees or see interbank business return back to pre-Baoshang levels, as policy-makers try to arrest the aggressive expansion of small financial institutions and push for deleveraging. Investors will need to reprice risks in the market and small banks will inevitably face balance sheet contractions and higher funding costs, which also means higher interest rates for their borrowers.

You go to market with the hypothesis you have. The CCP and PBoC have near omnipotent powers over the economy or they don't. I'm betting they don't. I do not know when it'll be triggered, but as in 2011, 2014 and 2016, there is once again signs of something larger being possible. Personally, I believe the time for understanding it has aleardy passed. Now is the time to be trading it or patiently waiting for the zero hour.

Carl Walter with Jim Grant

Sounding Line: Carl Walter: China Will Never Open Its Capital Markets

“(Baoshang) is scaring everybody because they’re not the only one. They’re the one that couldn’t hold it together in the end, but… I’ve been trying… to figure out how many banks there are in China and supposedly there are 134 of these city commercial banks. 134 of which (Baoshang) is one, and all of these guys use wealth management products or borrowed in the inter-bank market to fund local things. Or, they borrowed in the inter-bank market or borrowed in wealth management products to support local asset management companies to hide other banks’ bad loans. I don’t think (Baoshang) is unique and I think the reason the markets are scared is because everybody knows that the emperor has no clothes. There is a lot more than just the one.”

“…The main point is that the People’s Bank had gotten their way and opened on all these things. They liberalized the interest rates, so you got wealth management products… You saw what happened when the capital account opened up and they closed it again. There is no way in the world things like that are going to happen (again) in China in your lifetime, my lifetime, or anybody’s lifetime as long as the Party’s in control. No way…”

SME Lending Backfire: Big Banks Poach Small Bank Clients

Central planning fails again.

Caixin: Policy Steering Credit to Small Businesses Is Costing Small Banks Their Clients

In an attempt to meet government targets for lending to small enterprises, some big banks in some regions have poached high-quality clients from small and midsize local lenders by offering them lower interest rates, the law-enforcement inspection team of the Standing Committee of the National People’s Congress (NPC), China’s top legislature, said Wednesday in a report (link in Chinese). Such clients typically have a low risk of default.

Baoshang Bank Failure Still Rippling

Caixin: In Depth: How Baoshang Takeover Shook Secretive Corner of Bond Market

Beijing-based New China Fund Management recently said it was forced to default on some products after failing to get loans. The mid-size investment house is among a number of nonbank institutions that have felt a funding crunch as contagion fears spread in the wake of the Baoshang takeover. Ironically, the owner of New China Fund Management was previously controlled by the owner of Baoshang.

Although the central bank called Baoshang an isolated case, distrust among counterparties sparked by the incident have pushed up borrowing costs for smaller banks and nonbank institutions.

Third Bank Under Scrutiny: Jinan Rural Employee Publicly Accuses Bank Officers of Fraud

First it was Baoshang Bank being taken over. Then the PBoC stepped in to support Bank of Jinzhou in the interbank market. Now a third bank, Jinan Rural Commercial Bank, is drawing attention after rumors spread through WeChat. The key fact about this story is the bank employee used their real name, this is not an anonymous accusation. Moreover, the employee claims bank officers have been funding the mistresses and promiscuous lifestyle with bank funds.

iFeng: 济南农商行员工实名举报厅级干部：我啥都不怕了
Sogou: Jinan Agricultural Commercial Bank Staff Report Departmental Cadres with Real Names: I'm not afraid of anything

In addition, Bloomberg also reported that in 2013, a colleague from the former work unit gave birth to a child and invited me to accompany him to the hospital. I didn't accompany him because I was busy at work, and my nightmare started from then on. Later, I learned from the colleague that her child was Wang Zhongtan, the current director of Qingdao Banking Regulatory Bureau and then deputy director of the provincial banking regulatory bureau. The colleague got a quick promotion. Ding Haosheng, then deputy director of the Shandong Provincial Association in charge of personnel, also had this kind of male-female relationship in the system.

This story is already going viral.

iFeng: 济南农商行员工举报事件谜团：干部作风、员工管理、经济案
Sogou: The Mystery of Staff Report in Jinan Agricultural Commercial Bank: Cadre Style, Staff Management, Economic Case

A real-name reporting article from internal employees pushed Jinan Agricultural Commercial Bank to the forefront.

On June 8, Peng Bo, former deputy supervisor of Jinan Agricultural Commercial Bank, released an online article entitled "Real-name Report of Shandong Provincial Cadres' Misdemeanour and Loss of Bank Assets of Nearly 3 Billion Yuan" through his personal WeChat public number, pointing to many chaos in Jinan Agricultural Commercial Bank. On June 9, Jinan Agricultural and Commercial Bank's official WeChat released a message in response, saying, "Since May 24, Peng Bo has successively released information through individual websites and personal WeChat public numbers to fabricate facts and defame and maliciously slander relevant personnel."

Then, the two sides entered the second round from a distance. At noon on June 9, Peng Bo wrote again that "Jinan Agricultural Commercial Bank did not respond positively to all the problems I reported, including concealing 3 billion major cases, including the rapid promotion of leading mistresses ..." In an interview with the media on June 10, Ma Lijun, chairman of Jinan Agricultural Commercial Bank, commented on Peng Bo, saying, "By complaining, insulting and threatening, she tasted the benefits through this means. She wrote a" guarantee letter "in 2015."

On the evening of June 10, Peng Bo told surging news (www.thepaper.cn), "Ding Moumou (then deputy director of Shandong Rural Credit Union) took Ma Lijun and others with him, threatening to let me go to work, and asked me to write a guarantee that they would not talk about their problems in the future. If you don't write, you won't arrange your work. I didn't want to disturb them because I was exhausted physically and mentally. In order to get to work smoothly, I wrote a guarantee ". Later, surging news verified Peng Bo's statement to Ma Lijun, but as of press release, no response has been received.

At the same time of mutual resentment, whether the report on cadres' work style is true, whether Peng Bo's post adjustment is in compliance, and the progress of cases reported to the CBRC for more than two years ... too many mysteries remain unanswered, yet to be revealed by the official authorities.

iFeng has a special report section on this story, there are currently 12 stories.

In related news, a bank in Guizhou planning an IPO in Hong Kong discussed interbank risk in light of Baoshang Bank in its regulatory filings: 贵州银行提交港股IPO申请 提示包商银行同业存款风险

In addition to the general information disclosure, since the time of issuing the prospectus coincided with the serious credit risk of Baoshang Bank being taken over, Guizhou Bank disclosed the risks of the relevant business of Baoshang Bank in the prospectus.

The prospectus specifically reminds that as of March 31, 2019, the interbank deposits of Guizhou Bank in China Merchants Bank were 1.45 billion yuan, due to the significant increase in the expected credit risk of this interbank deposit. Therefore, the Bank of Guizhou decided to confirm the impairment loss of RMB 174 million on the amount of the profit and loss and other comprehensive income in the three months ended March 31.

This adjustment led to a significant increase in the provision for impairment losses of the Bank of China and other financial institutions in the first quarter of this year from RMB 600,000 in the same period in 2018 to RMB 174.6 million. Guizhou Bank also made a risk warning saying, “We cannot guarantee that other Chinese commercial banks that deposit interbank deposits will not have significant risks such as credit deterioration.”

Prior coverage

PBoC Steps in to Support Bank of Jinzhou
Baoshang Bank a Symptom of Widespread Corporate Looting
PBoC Blames Tomorrow Group for Isolated Risk of a Bank Crisis
China Banking: More Troubled Banks in Focus, PBoC Sets Up Deposit Insurance Company <--- this post has links to background on Bank of Jinzhou, it is not a surprise that this bank is in trouble

PBoC Steps in to Support Bank of Jinzhou

The key part of the story:

It is worth noting that this is the first interbank deposit receipt supported by the central bank. According to Jinzhou Bank's announcement, the inter-bank certificate of deposit is provided with credit enhancement by the private enterprise bond financing support tool (hereinafter referred to as CRMW)-if Jinzhou Bank fails to pay the full amount when the CD expires, the China Debt Credit Enhancement Investment Company will supplement the payment funds the next day.

　　CRMW tool is one of the "three arrows" prepared by the central bank since late October 2018 to rescue private enterprises. This tool is mainly aimed at the situation that private enterprises in the bond market have difficulty in issuing bonds, which leads to the breaking of the capital chain. Specifically, the central bank provides part of the initial funds through refinancing, and the China Debt Credit Promotion Investment Company supports private enterprises that encounter temporary difficulties in debt financing by selling credit risk mitigation tools, guarantee credit enhancement and other means (see Caixin Weekly, No.42, 2018, "Central Bank Credit Enhancement for Private Enterprises").

财新： 锦州银行拟新发同业存单 首获央行增信支持 (Jinzhou bank's proposed new inter-bank certificates of deposit received increased support from the central bank)

Due to the recent takeover of the contractor bank, the risks of some other small and medium-sized banks have aroused market concern and the issuance of certificates of deposit among peers has slowed down. In response, regulators have frequently voiced their opinions and taken measures to smooth market sentiment.

On June 10, Jinzhou Bank (00416.HK) announced the 141st issue of interbank certificates of deposit in 2019. On June 12, the bank plans to issue 2 billion yuan of inter-bank certificates of deposit (hereinafter referred to as CD) with a maturity of six months, with a rating of AAA, an issue price of about 98.42 yuan and a reference yield of 3.21%. A senior market insider told Caixin that this rate of return is the average market level.

It is worth noting that this is the first interbank deposit receipt supported by the central bank. According to Jinzhou Bank's announcement, the inter-bank certificate of deposit is provided with credit enhancement by the private enterprise bond financing support tool (hereinafter referred to as CRMW)-if Jinzhou Bank fails to pay the full amount when the CD expires, the China Debt Credit Enhancement Investment Company will supplement the payment funds the next day.

　　CRMW tool is one of the "three arrows" prepared by the central bank since late October 2018 to rescue private enterprises. This tool is mainly aimed at the situation that private enterprises in the bond market have difficulty in issuing bonds, which leads to the breaking of the capital chain. Specifically, the central bank provides part of the initial funds through refinancing, and the China Debt Credit Promotion Investment Company supports private enterprises that encounter temporary difficulties in debt financing by selling credit risk mitigation tools, guarantee credit enhancement and other means (see Caixin Weekly, No.42, 2018, "Central Bank Credit Enhancement for Private Enterprises").

The "June 30" liquidity test is approaching. Under the impact of the contractor bank incident, the market is concerned about whether small and medium-sized banks will suffer pains. On June 9, the official website of the central bank disclosed that the office of the financial stability development Committee had recently held a meeting to study the work of maintaining the stability of interbank business. At the meeting, the participating banks said that the scale of interbank business for other small and medium-sized banks would remain stable in the next step and the market order would be consciously maintained. At the same time, the People's Bank of China said it would use a variety of monetary policy tools to maintain a reasonable and sufficient liquidity in the financial market and provide targeted liquidity support to small and medium-sized banks.

Statistics from CICC's solid collection team show that on June 10, the actual issuance scale of interbank certificates of deposit accounted for 65% of the planned issuance scale, slightly warmer than the low point of the previous two weeks, but still lower than the 85% level before the contractor bank was taken over.

In recent days, Jinzhou Bank has been hit hard by the takeover of Baoshang Bank, resulting in difficult delivery of the annual report. At that time, financial institutions also sold Jinzhou Bank's bills.

Caixin reporter's inquiry data show that Jinzhou Bank has not issued any new CD since May 28 and has issued a CD stock of 48.61 billion yuan since 2019. According to the bank's 2019 issuance plan, the amount of CD to be issued for the whole year is 90 billion yuan, which is the highest in the interbank market.

Caixin reporters combined Jinzhou Bank's aforementioned issuance plan and previous financial reports to sort out, by the end of 2017, Jinzhou Bank had total assets of 723.4 billion yuan and total liabilities of 663.253 billion yuan. The expansion of the bank's balance sheet is driven by interbank investment and financing. On the asset side, the loan accounts for less than 30% of the total assets. The receivable investment under investment has exceeded 400 billion yuan, and the non-performing rate of this item has exceeded the non-performing rate of loans since 2016. On the debt side, the issuance of certificates of deposit by Jinzhou Bank has expanded significantly since 2016, with the amount of bonds payable reaching 30 billion yuan at the end of 2016, double the 15 billion yuan at the end of 2015. By the end of 2017, the amount of bonds payable by the bank was nearly 90 billion yuan, up 3 times from the end of 2016.

According to the aforementioned CD issuance plan of Jinzhou Bank, as of the end of 2017, the bank's non-performing rate was 1.04%, and its provision rate was 268.64%. This figure is obviously better than the average non-performing rate of 2% and the provision coverage rate of 150% in the banking industry, but the resignation of auditor Ernst & Young may indicate that there is moisture in this figure. Ernst & Young said it found that the bank's loan purpose was inconsistent with the contract.

On May 31, 2019, Jinzhou Bank announced that the board of directors and the audit committee received the resignation letter from Ernst & Young and immediately resigned as auditor of Jinzhou Bank. Prior to this, Jinzhou Bank had twice postponed the release of its 2018 annual report on April 1 and May 14. Trading of the company's shares was suspended from April 1. Later, Jinzhou Bank found a pre-listing agency to audit the annual report, which is expected to be published in August.

On the afternoon of June 9, the last day of the Dragon Boat Festival holiday, the CIRC issued its voice without naming and pointing out that "some have changed their auditors, with a large amount of tasks, and failed to complete the audit work on time." A few small and medium-sized banks fail to disclose their annual reports on time, which is a special case. These situations have been reported to the regulatory authorities according to regulations, and the regulatory authorities will urge relevant agencies to speed up the audit work and disclose the annual report as soon as possible. "

The legal representative and chairman of Jinzhou bank is now 62-year-old Zhang Wei, who has been the bank's chairman since 2008 and has not changed for 11 years. Jinzhou Bank's shareholding ratio is relatively scattered, and many major shareholders such as Dongxu Group, Tianyuan Manganese Industry, Baota Petrochemical and Huatai Motor are in poor financial condition and have many problems. Moreover, many shareholders pledged Jinzhou Bank's shares to the bank's affiliated companies or subordinate village banks. The true capital contribution is doubtful. So far, Jinzhou Finance Bureau holds less than 5%, only 4.27%. On June 2, people close to the supervision said Jinzhou local government would consider increasing capital and stabilizing the overall situation of the bank. However, so far Caixin reporter has not contacted Jinzhou Finance Bureau for verification.

Baoshang Bank a Symptom of Widespread Corporate Looting

Update: English version here

Many observers see the Baoshang Bank takeover as a banking story, but in good news for the banking sector and bad news for China's financial markets, it might be a sign of corporate looting instead. The Baoshang Bank incident came only a month after the Market Rattled by Kangmei's $4.4 Billion Accounting Error for example. At heart, China lacks property rights. Major shareholders can extract wealth and leave a hollowed-out shell of company in the hands of equity and debt holders. A major area of disagreement between China bulls and bears rests on this issue. Is the Baoshang Bank incident isolated or does it signal this problem is finally too big to handle?

Translation note: in a couple of places I changed the Google translation to "looting" and "hollowing out" as I think those are more accurate than the machine translation. Looting is a more accurate term for what is taking place, but the editorial itself did not use such a loaded word.

Caixin: Editorial | Baoshang Bank’s warning

Baoshang Bank was taken over and the action has just begun, but its impact on the market has gradually subsided. The bank has a large amount of funds to be controlled by the major shareholders tomorrow. occupied illegal , and it was difficult to return for a long time, which led to a serious credit crisis, which triggered the legal conditions to be taken over according to law for the first time in 20 years. This move is undoubtedly an important step in the "anti-risk" battle. This incident may have lost the sensation of news, but the reflection it brings should be long-lasting and profound. We should study how to prevent major shareholders from “looting” and explore how the regulatory authorities should deal with risk institutions in a timely manner to avoid problems.

At the beginning of the acceptance of Baoshang Bank, some market participants expressed doubts about whether this would impact the financial market when the downward pressure on the Chinese economy increased. There were also views on the trade friction between China and the United States, and questioned the timing of takeover. improper. Now it seems that these ideas are too much to worry about. The interest rate price signal in the interbank market indicates that the market has basically returned to calm. This is due to the thorough deployment and decisive efforts of the regulators. Several consecutive "answer reporters", explaining the reasons for taking over, the follow-up treatment plan and the liquidity of small and medium-sized banks, provided sufficient expectations to the market, eased market anxiety, and at the same time, the takeover action was proceeding in an orderly manner. However, this incident reflects the common problems of financial institutions represented by small and medium-sized banks and must be given sufficient attention. The takeover may be able to cope with the moment and solve the problem. However, the supervision should be institutional and normal, in order to cope with the endless financial risks. The Baoshang Bank incident is a lesson and a warning.

The crisis of the Baoshang Bank stems from the hollowing-out by major shareholders. This is not a new phenomenon. Similar incidents have long been commonplace and are not limited to the financial sector. However, due to the uncertainty, high leverage and contagiousness of financial risks, such hollowing-out behaviors are more harmful, spread more widely and more destructive. "Tomorrow Department" and "Ampang Department" have been wiped out one after another. Their methods have long been known. They are nothing more than resorting to capital evasion, capital injection, false capital injection, and mass transfer through improper affiliate transactions, depending on the financial institution as a "cash machine". Since the majority shareholder has mastered the absolute right to speak, the internal control mechanism of financial institutions is ineffective, and financial risks are finally detonated, which has severely hit financial credit. In China, there is still a long way to go to improve corporate governance in financial institutions.

Although it isn't directly applicable in this case, my mind goes back to cartoon I saw in the late 1990s of a man in a restaurant, paying for a fake bottle of XO with counterfeit renminbi. Both are happy. As long as you take Chinese financial statements at face value, you can invest with confidence!

The "financial crocodile" smashed not only the internal control of this layer of window paper. The "Tomorrow Department" incident has been more than two years, but the large amount of capital exchanges between the Baoshang Bank has not been significantly affected. Data show that as of the end of September 2018, the total debt of Baoshang Bank was 503.4 billion yuan, of which 212.9 billion yuan was absorbed by various deposits, and the inter-bank liabilities (including interbank deposit certificates) were 221.1 billion yuan. In 2018, the rating of the interbank deposit receipts of the contractor bank has been negative. Is the counterparty collectively neglecting risk management or completely disregarding the potential risks? It is difficult to draw conclusions. However, the "comprehensive beliefs" firmly believed by all parties that "there will always be people who have the bottom" have undoubtedly played a role in fueling the situation. As long as the return is high, the risk can be put aside. A mature financial market can never be so strange. Breaking the industry's belief in the business, it has tried in the process of taking over the Baoshang Bank, but it may not be thorough enough for various practical reasons. The next step needs to consider the regulatory system and process, how to prevent the emergence of the Nth Baoshang Bank.

If you want to promote an air of calm, do not use the term "Nth."

The Baoshang Bank incident reflects the bad ecology of financial institutions such as small and medium-sized banks. They have weak storage capacity, low internal control levels, bad growth, a large number of peers, and high costs. On the other hand, in recent years, China's financial industry has shown unprecedented prosperity. The added value of the financial services industry has been rising in proportion to the GDP, even surpassing the developed countries such as the United States and Britain. However, behind this surface prosperity is the constant pressure on the real economy. Finance is the blood of the modern economy and relies on the real economy. The development of the financial industry is inseparable from the soil of the real economy. If a large amount of money is only vacated in the financial sector, or even become a "blood machine" of the real economy, the existence of relevant financial institutions will have a big question mark. The reform of the financial supply side is to solve this structural problem. To build a multi-level, wide-coverage financial system, we must be able to effectively serve the real economy and meet social needs. At the same time, we must try our best to break down the institutional and institutional obstacles that restrict financial services. In this regard, we must make greater determination and courage.

This paragraph is the essence of many China bear theses. The U.S. economy is over-financialized, debt and interest costs are choking the real economy. China has by some measures surpassed the United States in its financialization and in the velocity of its debt creation.

As mentioned earlier, there have been some doubts about the timing of taking over the contractor's bank. Regardless of the endorsement of interest, it is necessary to distinguish the deviation of knowledge. Strengthening financial supervision should not set too many preconditions, and find that violations of laws and regulations should be promptly issued, otherwise it is tantamount to connivance or even collusion. The position of supervision cannot be loosened, and there should be no extraneous factors, otherwise it will become an opportunist. Over the years, the shareholding ratio and the number of homes held by the “Tomorrow Department” have long violated relevant regulatory requirements, but they have not been corrected for a long time. It can be a unique exception, which has transmitted very harmful to the financial market. signal. It is very necessary for the central bank and the regulatory authorities to face this "historical issue" and take it out. It should become a new starting point for strengthening supervision and reshaping China's financial ecology.

The storm of the Baoshang Bank incident has largely subsided. The person in charge of the central bank said that there is no plan to take over other institutions. We are also looking forward to this. However, the warnings issued in this case are not lost in general terms and should not be ignored. Established in 1999, Tomorrow Holdings constitutes the "wonderful situation of the 20 years in China's financial industry." Only by thoroughly disposing of the "Tomorrow Department" and its kind, and preventing the "Tomorrow System" from the system and supervision, the Chinese financial market is only Have a beautiful tomorrow.

Calm was restored to parts of the financial market after Bear Stearns went bankrupt. It didn't last. The biggest question around the Baoshang Bank takeover was why now, why this bank? Financial problems are normally swept under the rug. Was it a warning short to others, is it really a unique case as the regulators argue, or is it a sign that accumulated losses and fraud are becoming to large to handle?