Another Bank Run Highlights China’s Brewing Financial Crisis
A regional lender has become the latest victim of the growing liquidity crunch in the world’s most populous country. Yingkou Coastal Bank, operating in the northeastern Chinese province of Liaoning, is the second institution within less than a month to see its financial stability threatened by frightened savers. That happens while small Chinese banks are becoming heavily reliant on their depositors’ money.
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The bank run at Yingkou followed rumors that it is in deep trouble, which quickly spread on the internet, according to the police. A Reuters report detailed that worried depositors gathered at the bank’s branches earlier this month seeking information about their savings. Large amounts of cash were piled behind counters at several of its offices.
Local authorities intervened to calm down the situation and officials were dispatched to the bank’s main office in Yingkou. Notices were placed to assure account holders the institution had enough funds to continue normal operations. Similar measures were taken during a run at the Henan-based Yichuan Rural Commercial Bank in October. Urgent funding was provided, including by the People’s Bank of China, to keep that lender afloat.
Three other regional banks have been saved by the Chinese government so far this year. Baoshang Bank, based in the Inner Mongolia Autonomous Region, was seized by the PBOC in May. Bank of Jinzhou, which like Yingkou operates in Liaoning, was bailed out by three state-controlled asset managers this past summer. And in August, Heng Feng Bank also failed and was eventually nationalized. Small Banks Struggle With High Deposit and Low Lending Interest Rates
The collapse of Baoshang Bank led to not only raised levels of depositor anxiety but also rising interbank interest rates. Borrowing from bigger banks has become too expensive for small and medium-sized institutions, whose reliance on deposits has increased dramatically. Deposits formed 58% of Yingkou’s funding in June and in order to contain the current crisis it had to raise its already high interest rates, from 4.2 to 4.4% on annual deposits. For comparison, China’s benchmark rate for a one-year deposit is only 1.75%.
Other small banks have also increased their deposit interest rates. Meanwhile, Beijing has introduced government-mandated cuts in lending rates in a bid to stimulate Chinese companies to borrow more in a slowing economy. The need to attract savers and the obligation to lend cheaper capital have tremendously increased the pressure on these financial institutions. As a result, 586 of them have been classified as “high risk” in this year’s China Financial Stability Report which was published on Monday. As Bloomberg noted, that’s 13% of China’s 4,379 lenders. Over 10% of the institutions failed a stress test conducted by the PBOC in 2018.
The report highlights the central bank’s concerns about “still abundant” risks that accumulated in the past few years and will be hard to eliminate in the near future. Some of these risks, according to the regulator, are related to global trade and liquidity uncertainty as well as debt in low income households in certain Chinese regions. PBOC talks about the need to counter the threats arising from “abnormal” market fluctuations which, as it insists, stem from external shocks. It also vows to intensify supervision on stock, bond, and foreign exchange markets to prevent the transfer of risks to other sectors.
Do you think the problems of small Chinese banks will grow into a full-blown financial crisis? Share your expectations in the comments sectionbelow.
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