The Chinese banking sector may be at risk.

 The Chinese banking sector may be at risk. 中国银行业可能面临风险。

July 12 2024

The Chinese banking sector is facing a severe crisis. In just one week, 40 banks disappeared, and the collapse of Jiangxi Bank has further deepened the sector's problems. Experts warn that the situation could have severe consequences for the global economy.

Reports from China indicate the collapse of one of the banks. The portal renminbao.com published a report from outside the headquarters of Jiangxi Bank, which concerned clients stormed over bankruptcy rumors. The bank had previously informed that its profits could drop by 30% due to customers' loan repayment issues.

China's growing problems with banks

The Economist described the situation in the Chinese banking market. It was noted that approximately 3,800 banking institutions were threatened in China. Their assets are 55 trillion yuan ($7.5 trillion), representing 13% of the country's banking system. The magazine emphasizes that these banks have long been poorly managed and have accumulated vast amounts of bad loans.

The report states that many of them lent money to developers and local governments, exposing themselves to the impacts of the real estate market crisis. The authors note that in recent years, some banks have revealed that 40% of their portfolios are non-performing loans.

Disappearing banks and attempts to rescue the sector

The rare disclosure of a bank's problems may underscore the seriousness of the situation. A similar mechanism was observed with developer companies. Little was heard about the giants' problems until the authorities eventually confirmed an issue affecting the entire industry.

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"The Economist" points out that China's primary strategy in dealing with small, weak banks is to "absorb" them. Of the 40 recently disappeared institutions, 36 were located in Liaoning province and were taken over by a lender named Liaoning Rural Commercial Bank.

Cryptocurrency market analyst Sigma G also examined the situation in China's banking sector. He points out that the leading cause of the problems is the deep recession in China's real estate sector. Over-indebted developers and local governments fail to repay loans, leading to financial instability. Property prices have plummeted, and construction projects have been halted, further burdening the economic system.

The author also highlights the issue of hidden bad debts. Banks have used asset management companies (AMCs) to offload toxic loans, creating an illusion of stability. However, a new banking regulator, the National Financial Regulatory Administration (NAFR), has begun cracking down on these practices by imposing fines and increasing oversight.

Outlook for the Chinese economy

The author predicts that the Chinese economy is entering a prolonged and feigned growth phase. "Years of credit-fueled growth has finally run its course, and the result will be. lower growth for China and a negative impact on the global economy. Slower growth of the Chinese economy will, in turn, exacerbate their banking problems too," warns Sina_21st.

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The expert forecasts that slower growth in China's economy will exacerbate banking problems. He believes this situation will most likely end with massive liquidity injections, economic stimulation, and investors fleeing towards hard assets.

S&P experts quoted by "The Economist" estimate that repairing China's banking system could take up to a decade. However, official data may still not reflect the scale of the problem. The 2023 report of the People's Bank of China states that 3,655 banks, whose assets accounted for 98.28% of all assets deposited in Chinese banks, are safe. The Chinese bank also confirmed that the risk concerns a portion of small and medium-sized financial institutions operating in rural areas. According to the document, large banks received good ratings, indicating the stability of the economic system.

The clock is ticking, problems may deepen

Why do small banks have such big problems? Many Chinese cities and even entire regions are drowning in debt. The liabilities were so high that local government representatives sent envoys to Beijing in the spring. They are negotiating terms for repaying billions in loans. Unpaid debts are increasingly weighing on regional economies, threatening national economic growth.

The debts that Chinese cities are drowning in are primarily the consequences of the real estate crisis and the effects of the pandemic. Over the past decade, many construction projects were financed with debt. Infrastructure development was supposed to drive local growth, but following the crisis caused by the COVID-19 pandemic, local governments lost the ability to continue investing. Meanwhile, they still have to repay old debts.

Goldman Sachs estimates the debts of the most important Chinese regions at $13 billion. Some of these liabilities are public bonds, and defaulting on them could damage the entire economy.

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40 Banks Shut Down in Sudden ‘Vanishing Act’ – Absorbed Into Larger Lenders As Economy Teeters in China: Report

Banks are collapsing at an unprecedented rate in China due to a major downturn in the country’s property market, poor risk controls and other issues.

In the week ending on June 24th, 40 smaller banks were sucked up by larger institutions, a vanishing act incomparable even to the savings and loan crisis of the 1980’s and 90’s, reports The Economist.

The report tracks roughly 3,800 lenders in rural China that hold a whopping $7.5 trillion in assets, or 13% of the entire banking system, that are starting to bleed out due to an overstock of bad loans. Some of them have admitted that as much as 40% of their portfolios are non-performing loans.

Thirty-six of the 40 failed institutions were all absorbed into one giant lender: Liaoning Rural Commercial Bank, which was set up by regulators in September to manage bad banks.

According to the Economist, five similar institutions have been created in the last 10 months for the same purpose of absorbing small bad banks – which critics warn will only lead to “bigger, badder” banks.

At the same time, the Chinese economy has shown multiple signs of hitting a wall in the last year, including sharp downturns in residential construction and sales, consumer confidence and consumer prices, combined with a declining population and soaring debt as a percentage of GDP.

But as China’s economy struggles at the local level, its biggest banks continue to flourish, consolidating the fallen institutions while drastically expanding their market cap.

According to S&P Global, Industrial and Commercial Bank of China Ltd. (ICBC), the largest bank in China, maintained its position as the largest bank in the Asia Pacific region in Q2 of 2024, while China Construction Bank Corp, the second largest bank in China, saw the greatest market cap expansion of the quarter as it rose 21.4%.

S&P Global also reports that “the weak may get weaker,” with smaller institutions likely to be the most vulnerable to an expected “prolonged property downcycle,” and a government more selective on who it wants to save.

“Rural banks on average had the highest NPL ratio, lowest profitability, and weakest capital and provision coverage buffers at end-2023…

More financial institutions could fall into trouble over the next two to three years. The bankruptcies of two rural banks in Liaoning province 2022 is a sign that government support is becoming more selective. That said, any reduction in support to poorly managed financial institutions could be gradual, given the system has many weak small banks.”

Chinese government bonds are on fire. That’s ringing alarm bells in Beijing

Wednesday July 3, 2024

Money is rushing into Chinese government bonds, sending their prices soaring and yields plunging to record lows as investors hunt for a safer alternative to the country’s ravaged real estate market and volatile stocks.

The yield on China’s onshore 10-year government bond, which is a benchmark for a wide range of interest rates, touched 2.18% Monday, the lowest since 2002 when records began. Yields on 20-year and 30-year bonds are also hovering around historic lows. Bond yields, or the returns offered to investors for holding them, fall as prices rise.

Lower borrowing costs should be welcome in an economy struggling to recover from a property crash, sluggish consumer spending and weak business confidence. But the sharp move in bonds is sparking talk of a bubble and triggering acute anxiety among China’s policymakers, who fear a crisis similar to the collapse of Silicon Valley Bank (SVB) last year.

The People’s Bank of China (PBOC) has issued over 10 separate warnings since April about the risk that a bond bubble could burst, destabilizing financial markets and derailing the Chinese economy’s uneven recovery. Now it’s doing something unprecedented —borrowing bonds to sell them to tamp down prices.

“SVB in the United States has taught us that the central bank needs to observe and evaluate the situation of the financial market from a macro-prudential perspective,” PBOC Governor Pan Gongsheng said at a financial forum in Shanghai late last month.

“At present, we must pay close attention to the maturity mismatch and interest rate risks associated with the large holdings of medium and long-term bonds by some non-bank entities,” the central bank governor added. Those entities include insurance companies, investment funds and other financial firms.

Lessons from the US

SVB was the biggest US bank failure since the global financial crisis. The roots of its demise lay in the fact that SVB had ploughed billions into US government bonds, an apparently safe bet that came unstuck when the Federal Reserve began hiking interest rates to tame inflation. Prices of the bonds SVB was holding fell, eroding its finances.

Policymakers in China fear the risk of a similar crisis in the world’s second largest economy if the bond frenzy goes unchecked. Prices of Chinese bonds have risen fast since early this year as investors pile into them because of the uncertain economic outlook. Businesses are also borrowing less, leaving banks with excess cash they have to park somewhere.

“Credit demand is weak due to the property woes. As a result, banks have to buy more bonds as money is trapped in the interbank market,” said Larry Hu, chief China economist for Macquarie Group.

A “deflationary outlook” for the economy has also taken hold among investors, prompting them to flock to long-term sovereign bonds, he added.

Similar to SVB, China’s financial institutions have invested a significant amount in long-term government bonds, which make them vulnerable to sudden interest rate changes.

Beijing is concerned that if the bond bubble pops, sending prices down and yields up, those lenders could suffer big losses.

“What worries policymakers is the interest rate risk, which will rise once the dominant narrative shifts from deflation to reflation,” Hu from Macquarie said.

In the first half of this year, net purchases of sovereign bonds by financial institutions, mostly by regional banks, were 1.55 trillion yuan ($210 billion), up 61% from the same period last year, according to an analysis of central bank data by Zheshang Securities, a state-controlled brokerage firm.

Official interest rates in China are low after cuts in recent years by the PBOC aimed at supporting the economy. Deflationary pressures have persisted — consumer prices rose less than expected in May and factory prices declined for the 20th month in a row.

But “once external demand slows, Beijing will have to step up stimulus to achieve its (economic) growth target,” Hu said.

If that happens, bond yields will rise as investors switch back into riskier stocks. Meanwhile, demand for credit should rise, banks will lend more and therefore reduce their holdings of government debt. This will cause the bond bull market to reverse, Hu said.

The country’s “4,000 or so small and medium-sized banks” will be particularly vulnerable to the interest rate risk, he added.

Cooling the frenzy

In a sign of growing concerns, the PBOC said Monday it would intervene directly in the bond market to cool the frenzy for “the first time in history,” according to state media.

The central bank will borrow government bonds from traders on the open market, so that it can sell them in a bid to depress prices and boost yields.

The decision was made after “careful observation and assessment” and was intended to “maintain the sound operation of the bond market,” the PBOC added.

Chinese state media outlets are also sounding the alarm. The state-owned Securities Times warned Tuesday about the risks of a bond market bubble, calling out the case of SVB and a Japanese bank whose holdings of US and European government debt have lost value as yields have risen.

“The bubble formed by the rush of funds into the bond market is accumulating interest rate risks,” the Securities Times said in an editorial. “The ‘triggers’ for the bankruptcy of SVB and the huge losses of Japan’s Norinchukin Bank were all interest rate risks caused by their over-reliance on bond investment.”

The repeated verbal warnings have so far failed to rein in soaring bond prices. Hence this week’s market intervention.

Monday’s move “demonstrates the PBOC’s determination” to cool the rally by selling bonds and lifting yields, said Zhang Jiqiang, chief fixed-income analyst at Huatai Securities.

“The central bank wants to avoid an SVB-style crisis,” he said.

Economic risks

The rapid decline in Chinese bond yields also poses significant risks to the economy.

“Low government bond yields do more harm than good to the economy in the current circumstance,” said Ken Cheung, director of foreign exchange strategy at Mizuho Securities in Hong Kong.

That’s because they could reinforce market expectations for aggressive interest rate cuts by the PBOC and weak growth, exacerbating the formation of “deflation mindset,” he said.

In addition, the bond market frenzy may counteract the PBOC’s efforts to boost economic activity and increase money supply, as it encourages capital to flow into the bond market, rather than going to riskier assets such as stocks, property, and other investments that drive economic growth.

The decline in Chinese government bond yields could also widen the interest rate spread between the US and China, causing money to flee the world’s second largest economy and heaping pressure on the yuan.

“China’s capital outflows in April reached the highest level since Jan 2016, largely due to the widening US-China yield gap,” Hu said. “Therefore, the PBOC doesn’t want to see interest rates fall too quickly.”

中国银行业正面临严重危机。短短一周内，40家银行倒闭，江西银行倒闭进一步加深了该行业的问题。专家警告称，这种情况可能对全球经济产生严重后果。

来自中国的报道显示其中一家银行倒闭。门户网站“人民报”刊登了江西银行总部外的报道，该银行破产传闻引发客户担忧。该行此前曾表示，由于客户贷款偿还问题，其利润可能下降30%。

中国银行业问题日益严重

《经济学人》描述了中国银行业市场的情况。它指出，中国约有3800家银行机构受到威胁。它们的资产为55万亿元人民币（7.5万亿美元），占该国银行体系的13%。该杂志强调，这些银行长期以来管理不善，积累了大量不良贷款。

 报告指出，其中许多银行向开发商和地方政府放贷，使自己暴露在房地产市场危机的影响之下。作者指出，近年来，一些银行披露其投资组合中有 40% 是不良贷款。

消失的银行和拯救该行业的尝试

银行问题的罕见披露可能凸显了形势的严重性。开发商公司也观察到了类似的机制。直到当局最终确认影响整个行业的问题之前，几乎没有人听说过这些巨头的问题。

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《经济学人》指出，中国处理小型、弱势银行的主要策略是“吸收”它们。在最近消失的 40 家机构中，有 36 家位于辽宁省，被一家名为辽宁农村商业银行的贷方接管。

加密货币市场分析师 Sigma G 还研究了中国银行业的状况。他指出，问题的主要原因是中国房地产行业的深度衰退。 负债累累的开发商和地方政府无法偿还贷款，导致金融不稳定。房地产价格暴跌，建筑项目停工，进一步加重了经济体系的负担。

作者还强调了隐藏坏账的问题。银行利用资产管理公司（AMC）来转移不良贷款，制造出稳定的假象。然而，新的银行监管机构——国家金融监督管理局（NAFR）已开始通过罚款和加强监督来打击这些行为。

中国经济前景

作者预测，中国经济正进入一个长期的虚假增长阶段。“多年的信贷驱动增长终于走到了尽头，其结果将是。中国经济增长放缓，并对全球经济产生负面影响。中国经济增长放缓反过来也会加剧他们的银行业问题，”Sina_21st警告说。

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专家预测，中国经济增长放缓将加剧银行业问题。他认为，这种情况很可能以大规模流动性注入、经济刺激和投资者涌向硬资产而告终。

《经济学人》援引标普专家的估计，修复中国银行系统可能需要长达十年的时间。然而，官方数据可能仍未反映问题的规模。中国人民银行2023年的报告指出，3655家银行是安全的，这些银行的资产占中国银行所有资产的98.28%。中国银行还证实，风险涉及一部分在农村地区运营的中小型金融机构。根据该文件，大型银行获得了良好的评级，表明经济体系的稳定性。

时间紧迫，问题可能会加深

为什么小银行会有这么大的问题？许多中国城市甚至整个地区都深陷债务泥潭。 由于负债过高，地方政府代表于今年春季派特使前往北京。他们正在就偿还数十亿美元贷款的条件进行谈判。未偿还债务对地区经济的负担越来越重，威胁到国家经济增长。

中国城市深陷债务泥潭，主要是房地产危机和疫情的影响。在过去十年中，许多建设项目都是通过债务融资的。基础设施建设本应推动地方经济增长，但在新冠疫情引发危机之后，地方政府失去了继续投资的能力。与此同时，他们还得偿还旧债。

高盛估计，中国最重要地区的债务总额高达 130 亿美元。其中一些债务是公共债券，违约可能会损害整个经济。

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据报道，40 家银行突然“消失”——被大型银行吸收，中国经济摇摇欲坠

由于房地产市场大幅下滑、风险控制不力等问题，中国银行正以前所未有的速度倒闭。

 据《经济学人》报道，截至 6 月 24 日的一周内，40 家小型银行被大型机构吞并，这种消失甚至与 20 世纪 80 年代和 90 年代的储蓄和贷款危机都无法相比。

该报告追踪了中国农村地区大约 3,800 家银行，它们持有高达 7.5 万亿美元的资产，占整个银行体​​系的 13%，由于不良贷款过多，这些银行开始亏损。其中一些银行承认，其投资组合中有多达 40% 是不良贷款。

40 家破产机构中有 36 家被一家大型银行吸收：辽宁农村商业银行，该银行由监管机构于 9 月成立，旨在管理不良银行。

据《经济学人》报道，过去 10 个月内，已有五家类似的机构成立，目的同样是吸收小型不良银行——批评人士警告称，这只会导致“银行更大、更坏”。

 与此同时，中国经济在过去一年中显示出多种陷入困境的迹象，包括住宅建设和销售、消费者信心和消费者价格的急剧下滑，以及人口下降和债务占 GDP 的比例飙升。

但随着中国经济在地方层面陷入困境，其最大的银行继续蓬勃发展，在整合倒闭机构的同时大幅扩大其市值。

根据标普全球的数据，中国最大的银行中国工商银行股份有限公司 (ICBC) 在 2024 年第二季度保持了其作为亚太地区最大银行的地位，而中国第二大银行中国建设银行股份有限公司的市值在本季度增长了 21.4%，是该季度最大的。

标普全球还报告称，“弱者可能会变得更弱”，规模较小的机构可能最容易受到预期的“长期房地产下行周期”的影响，而政府在拯救对象方面也更加挑剔。

 “截至 2023 年底，农村银行的不良贷款率平均最高，盈利能力最低，资本和拨备覆盖缓冲最弱…

未来两到三年，更多金融机构可能会陷入困境。2022 年辽宁省两家农村银行破产表明政府的支持正变得更加有选择性。话虽如此，考虑到该系统有许多实力较弱的小银行，对管理不善的金融机构的任何支持减少都可能是渐进的。”

中国政府债券火爆。这给北京敲响了警钟

2024 年 7 月 3 日，星期三

随着投资者寻求更安全的替代方案来取代该国饱受摧残的房地产市场和动荡的股票，资金涌入中国政府债券，导致其价格飙升，收益率跌至历史低点。

 中国境内 10 年期国债收益率是各种利率的基准，周一触及 2.18%，为 2002 年开始记录以来的最低水平。20 年期和 30 年期国债收益率也在历史低点附近徘徊。债券收益率，即投资者持有债券获得的回报，会随着价格上涨而下降。

在一个努力从房地产崩盘、消费支出低迷和商业信心疲软中复苏的经济体中，较低的借贷成本应该受到欢迎。但债券市场的大幅波动引发了泡沫的讨论，并引发了中国政策制定者的强烈焦虑，他们担心会出现类似于去年硅谷银行 (SVB) 倒闭的危机。

自 4 月以来，中国人民银行 (PBOC) 已发出 10 多次警告，称债券泡沫可能破裂，从而破坏金融市场稳定，并破坏中国经济不平衡的复苏。 现在，央行正在做一件前所未有的事情——借入债券，然后卖出，以压低价格。

“硅谷银行在美国的经验告诉我们，央行需要从宏观审慎的角度观察和评估金融市场的状况，”中国人民银行行长潘功胜上个月底在上海的一个金融论坛上表示。

“当前，我们必须密切关注一些非银行实体大量持有中长期债券所带来的期限错配和利率风险，”央行行长补充道。这些实体包括保险公司、投资基金和其他金融公司。

美国的经验教训

硅谷银行是全球金融危机以来美国最大的银行破产案。硅谷银行破产的根源在于，硅谷银行曾投入数十亿美元购买美国政府债券，这似乎是一笔稳妥的投资，但当美联储开始加息以抑制通胀时，这笔投资就落空了。硅谷银行持有的债券价格下跌，侵蚀了其财务状况。

如果债券热潮得不到遏制，中国的决策者担心，世界第二大经济体可能出现类似的危机。由于经济前景不明朗，投资者蜂拥购买中国债券，中国债券价格自今年年初以来迅速上涨。企业借款减少，银行不得不将多余的现金存放在某个地方。

麦格理集团首席中国经济学家胡伟俊表示：“由于房地产危机，信贷需求疲软。因此，由于资金被困在银行间市场，银行不得不购买更多债券。”

 他补充说，投资者也对经济的“通货紧缩前景”产生了兴趣，这促使他们纷纷购买长期主权债券。

与硅谷银行类似，中国的金融机构在长期政府债券上投入了大量资金，因此很容易受到利率突然变动的影响。

北京担心，如果债券泡沫破裂，导致价格下跌、收益率上升，这些贷款机构可能会遭受巨大损失。

麦格理的胡表示：“政策制定者担心的是利率风险，一旦主流叙事从通货紧缩转向通货再膨胀，利率风险就会上升。”

根据国有券商浙商证券对央行数据的分析，今年上半年，金融机构（主要是地方银行）净购买主权债券 1.55 万亿元人民币（2100 亿美元），比去年同期增长 61%。

近年来，中国人民银行为支持经济而降息，目前官方利率处于低位。 通货紧缩压力持续存在——5 月份消费者价格涨幅低于预期，工厂价格连续 20 个月下降。

但“一旦外部需求放缓，北京将不得不加大刺激力度以实现其（经济）增长目标，”胡说。

如果发生这种情况，随着投资者转向风险较高的股票，债券收益率将上升。与此同时，信贷需求应该上升，银行将增加贷款，从而减少持有的政府债券。胡说，这将导致债券牛市逆转。

他补充说，该国“约 4,000 家中小型银行”将特别容易受到利率风险的影响。

冷却狂热

据官方媒体报道，中国人民银行周一表示，将“历史上首次”直接干预债券市场以冷却狂热，这表明人们的担忧日益加剧。

央行将从公开市场的交易商那里借入政府债券，以便可以出售它们以压低价格并提高收益率。

 中国人民银行补充说，这一决定是在“仔细观察和评估”之后做出的，旨在“保持债券市场的稳健运行”。

中国官方媒体也在敲响警钟。国有媒体《证券时报》周二警告称，债券市场存在泡沫风险，并指出硅谷银行和一家日本银行持有的美国和欧洲政府债券因收益率上升而贬值。

《证券时报》在一篇社论中称：“资金涌入债券市场形成的泡沫正在积累利率风险。硅谷银行破产和日本农林中央银行巨额亏损的‘诱因’都是过度依赖债券投资导致的利率风险。”

反复的口头警告迄今未能遏制债券价格飙升。因此，本周进行了市场干预。

 华泰证券首席固定收益分析师张继强表示，周一的举措“表明了中国人民银行通过出售债券和提高收益率来冷却涨势的决心”。

“央行希望避免发生硅谷银行式的危机，”他说。

经济风险

中国债券收益率的快速下降也给经济带来了重大风险。

瑞穗证券驻香港外汇策略主管张健表示：“在当前情况下，低国债收益率对经济弊大于利。”

他说，这是因为它们可能强化市场对中国人民银行大幅降息和经济增长疲软的预期，加剧“通货紧缩心态”的形成。

此外，债券市场的狂热可能会抵消中国人民银行刺激经济活动和增加货币供应量的努力，因为它鼓励资本流入债券市场，而不是流向股票、房地产等风险较高的资产和其他推动经济增长的投资。

中国国债收益率下降还可能扩大中美之间的利差，导致资金逃离世界第二大经济体，给人民币带来巨大压力。

胡说：“中国 4 月份资本外流达到 2016 年 1 月以来的最高水平，这主要是由于中美收益率差距扩大。因此，中国人民银行不希望看到利率下降得太快。”