Beijing: The Chinese government has acquired the Baoshang bank that was heading towards bankruptcy. This is the first instance of the Chinese government taking over a private bank in the last two decades. This exposes the weakness of the Chinese banking sector, credit availability and economy, and these are indications of the beginning of a new economic crisis. Although the Chinese officials have said that this an exceptional case, it has been exposed that following this incident, rules for credit to the smaller banks have been made more stringent.
The United States and China had agreed on a temporary suspension of the trade war, at the G-20 summit. But the Chinese economy has already been jolted by the taxes and sanctions imposed by the United States. The Chinese agencies are themselves publishing reports, showing that this is weakening the Chinese economy. Colossal funding is being provided to the internal economy to reduce the effects of the trade war, with the United States. US President Trump also had openly mentioned this.
Huge credit lines have been made available to most of the banks in the country and care has been taken that the industry and the projects remain sufficiently funded. Against this background, the Baoshang bank issue comes as a shock for Chinese, as well as the foreign investors having exposure in China. In 2017 the Baoshang bank had reported a profit of $600 million and had informed that it was controlling assets worth $90 billion. Reasons for the sudden collapse of this healthy-looking bank, are said to be the investments in other sectors by the owners of the bank and the inquiry initiated by the Chinese government. But a bank collapsing in this manner has never been reported till date, in China.
There is an unwritten rule in the Chinese banking industry that the government funds and rescues the bank, not allowing a collapse. This is known as the ‘Hard Guarantee’. The Chinese government has broken the convention in case of the Baoshang bank and straightaway taken over the bank. After the takeover, the process for setting up a new administrative system has been initiated. As per the Chinese sources, the bank deposits and loans have been guaranteed to the extent of 70 to 80 per cent.
Following the Baoshang bank incident, the Chinese central bank has made funding to the tune of Yuan 600 billion, to the banking sector. But at the same time, the rules for the smaller banks are being made more stringent. The cost of funds coming from the banks has gone up, and the stricter lending criteria have been indicated.
While the Chinese industry is bearing the jolts of the trade war with the United States, the lack of funds can prove detrimental to the industry sector. This can have extensive effects on many factors like unemployment, internal demand, along with industrial production. Taking this into account, although China has wound up the Baoshang bank issue in a jiffy, as per analysts and experts, this could be an invitation for a new crisis in the economy.