Zero Hedge is speculating that China’s financial sector is in severe distress. Last week, the Chinese government was forced to seize control of Baoshang Bank, which had assets totaling about $83 billion, as it neared collapse. This is the first major bank failure in China in decades.
Shortly after the collapse of Baoshang, China’s central bank, the People’s Bank of China (PBOC), was forced to inject $36 billion through open market operations, similar to moves the Federal Reserve made to stabilize the US economy in the wake of the 2008 financial crisis and the Lehman Brothers collapse.
It also drew attention to the fact that many smaller banks in China are also severely distressed. Short term liquidity in the banking sector was negatively impacted by the Baoshang collapse.
A UBS analyst has warned that there are a lot of other banks which may be nearing failure, much like Baosheng:
According to UBS analyst Jason Bedford, who in 2017 was the first to highlight Baoshang’s troubles, there are several other banks that have “identical leading risk indicators” to Baoshang. Hengfeng Bank, Jinzhou Bank Co. and Chengdu Rural Commercial Bank all failed to publish their latest financial statements, have a large portion of their balance sheets invested in “loan-like investment assets” and are subject to negative local media coverage.
Yesterday, Zero Hedge reported that the Bank of Jinzhou, a much larger bank with $105 billion in assets, is now poised for collapse:
Unfortunately for the PBOC, Beijing is now racing against time to prevent a widespread panic after it opened the Pandora’s box when it seized Baoshang Bank two weeks ago, the first official bank failure in a odd replay of what happened with Bear Stearns back in 2008, when JPMorgan was gifted the historic bank for pennies on the dollar.
And with domino #1 down, the question turns to who is next, and will they be China’s Lehman.
One day later we may have gotten our answer, when the Bank of Jinzhou, a city commercial bank in Liaoning Province, the second name in the list above, and with some $105 billion in assets, notably bigger than Baoshang, announced that its auditors Ernst & Young Hua Ming LLP and Ernst & Young had resigned, not long after the bank announced it would delay the publication of its annual reports.
For those confused, the delay of an annual report and the resignation of an auditor, means a bank failure is not only virtually certain but practically imminent.
The reason for the resignation: the bank refused to provide E&Y with documents to confirm the bank’s clients were able to service loans, amid indications that the use of proceeds of certain loans granted by the Bank to its institutional customers were not consistent with the purpose stated in their loan documents.
Much more at the link. I strongly recommend readers interested in this topic read the whole thing.
Buckle up folks. If a major banking sector crisis emerges in China and the PBOC loses control, then we are probably looking at major trouble for China’s economy… which could in turn cause a global recession.