Why are So Many Chinese Banks Disappearing?

Summary

The script discusses China's banking system amidst a property crisis, revealing the stress on banks due to falling land and property prices. It outlines the structure of China's banking system, from mega banks to rural banks, and how the crisis has impacted them, leading to consolidations. The potential negative effects on China's deflationary woes, including the impact on consumer demand and the shift towards a more centralized state-led banking model, are highlighted.

Takeaways

• 🏦 China's economy is facing a property crisis that is affecting its banking system, with signs of stress emerging as banks deal with falling land and property prices.
• 📉 The property crisis has led to an unprecedented consolidation of smaller banks into larger ones, with 40 banks being absorbed in just the last week of June.
• 🏢 China's banking system is divided into three layers: mega banks, province-level banks, and small rural banks, each serving different sectors and having varying levels of stability and oversight.
• 🌐 The 'big four' mega banks in China are among the largest in the world by assets and are state-owned with the CCP holding controlling stakes.
• 📊 Small rural banks, although they hold less assets, are crucial for providing credit to rural populations and maintaining consumer demand.
• 💔 The ongoing property crisis has put pressure on banks' balance sheets, with a significant portion of their lending tied to property developers and mortgage holders.
• 📉 As property prices fall, both developers and households are defaulting on loans, leading to less lending and cash flow for banks.
• 🚫 Local governments, which have traditionally bailed out struggling regional banks, are now facing their own financial constraints due to increased debt and falling land prices.
• 🔄 The shift from local government bailouts to bank consolidations indicates a move towards a more centralized state-led banking model in China.
• 📈 However, this consolidation could potentially reduce household purchasing power and increase the risk of a deflationary crisis similar to Japan's experience.
• 📚 The video also promotes Skillshare as a platform for learning various skills, including e-commerce and web development, offering a free trial for new users.

Q & A

What has been the main issue facing the Chinese economy in recent years?

The main issue has been a slow-burning property crisis.

How has the property crisis affected China's banking system?

The property crisis has caused stress in the banking system, with falling land and property prices affecting banks' balance sheets.

What new strategy has the Chinese government adopted to address the banking issues?

The Chinese government has started consolidating smaller, vulnerable banks into larger ones.

How many smaller banks were consolidated in the last week of June?

About 40 smaller banks, approximately 1% of all rural banks, were consolidated.

Can you describe the three layers of China's banking system?

At the top are the national Mega Banks, followed by provincial-level banks, and finally the small rural banks.

Who are the 'big four' banks in China?

The 'big four' are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China, and the Agricultural Bank of China.

What role do smaller rural banks play in China's economy?

They are crucial for providing credit to millions of Chinese citizens in the countryside and are more focused on lending to households.

Why are smaller banks more fragile compared to larger banks?

They have less financial strength and are subject to less regulatory oversight, leading to riskier lending practices.

How did local governments previously help failing regional banks?

Local governments used special-purpose bonds to buy up non-performing or toxic assets from the banks' balance sheets.

Why can local governments no longer easily bail out failing regional banks?

Local governments face borrowing restrictions due to increased debt burdens and are also financially strained by the property crisis.

What impact could the consolidation of smaller banks into larger ones have on China's deflationary crisis?

It could exacerbate the deflationary crisis by reducing households' purchasing power and potentially increasing China's export capacity.

How has consumer demand affected inflation in China recently?

Weak consumer demand has led to low inflation rates, occasionally slipping into deflation.

What was the year-on-year consumer inflation rate in China for June?

The year-on-year consumer inflation rate was 0.2% in June.

What online learning platform is sponsoring the video?

Skillshare is the sponsor of the video.

What type of courses does Skillshare offer?

Skillshare offers courses in film, illustration, design, freelance productivity, and more, led by industry experts.

How can viewers get a free trial to Skillshare?

The first 500 people to use the link in the video's description will receive a one-month free trial to Skillshare.

Outlines

00:00

🏦 China's Banking System and Property Crisis

This paragraph discusses the impact of China's property crisis on its banking system. It explains how the Chinese economy has been dealing with a slow-burning property crisis, which has put stress on banks due to falling land and property prices. The script outlines the structure of China's banking system, which includes mega banks, provincial banks, and rural banks, and how the crisis has affected their operations. It also touches on the CCP's strategy of consolidating smaller banks into larger ones to mitigate the crisis, with 40 banks being absorbed in just one week in June. The paragraph sets the stage for a deeper analysis of the banking system's challenges and the potential implications for China's economy.

05:01

📉 Impact on Consumer Demand and Deflation Risks

The second paragraph delves into the consequences of the banking crisis for China's consumer demand and the risk of deflation. It highlights the strain on local governments' finances due to falling land prices and the resulting spike in borrowing costs, which has limited their ability to bail out struggling banks. The paragraph explains how the absorption of smaller banks into larger ones under CCP oversight is part of a shift towards a more centralized state-led banking model. While this may reduce bank failures, it could negatively impact consumer demand and exacerbate deflation, as smaller banks are more focused on household lending. The script also mentions the broader economic context, including China's struggle with low inflation rates and the potential for a Japan-style deflationary crisis. It concludes with a promotional note on Skillshare's online learning platform, which offers courses to help with various professional and creative endeavors.

Keywords

💡Chinese Economy

The Chinese Economy refers to the economic system of China, which is the world's second-largest economy. In the context of the video, it is highlighted as struggling with a 'slow-burning property crisis,' indicating a prolonged downturn in the real estate sector that is affecting other areas of the economy. This crisis is a central theme of the video, as it influences the banking system and overall economic health.

💡Property Crisis

A property crisis is a situation where there is a significant downturn in the real estate market, often characterized by falling property prices and reduced demand for housing. In the video, it is mentioned that this crisis is impacting the banking system by causing stress as banks face challenges with falling land and property prices, leading to a decrease in lending and an increase in defaults.

💡Banking System

The banking system refers to the network of financial institutions that provide services such as accepting deposits, lending money, and facilitating payments. The video discusses how China's banking system is affected by the property crisis, with smaller, more vulnerable banks being absorbed into larger ones to mitigate the risks associated with the economic downturn.

💡Mega Banks

Mega banks are very large banks that dominate the financial sector in terms of assets and influence. The video mentions the 'big four' banks in China, which are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China, and the Agricultural Bank of China. These banks are significant as they are state-owned and account for more than half of all banking activity in China.

💡Rural Banks

Rural banks are smaller financial institutions that operate primarily in rural areas, serving local communities. In the video, rural banks are highlighted as being more focused on lending to households, which is crucial for consumer demand. However, they are also more fragile and are being consolidated into larger banks due to the property crisis, which is affecting their balance sheets.

💡Consolidation

Consolidation in the banking sector refers to the process where smaller banks are merged into larger ones, often to improve stability and efficiency. The video discusses how an unprecedented number of smaller banks are being consolidated into larger ones, which is a response to the stress caused by the property crisis and a move towards a more centralized state-led banking model.

💡Local Governments

Local governments play a significant role in the video's narrative as they are often the recipients of loans from regional banks, using long-term leases for land as collateral. The property crisis has strained local government finances, limiting their ability to bail out struggling banks, which in turn leads to the consolidation of these banks into larger, more stable institutions.

💡Deflation

Deflation is an economic condition characterized by a general decline in prices for goods and services, often accompanied by a decrease in the volume of economic activity. The video mentions that China is struggling with deflation, with weak consumer demand leading to low inflation rates. The consolidation of banks and the focus on lending to companies rather than households could exacerbate this issue.

💡Consumer Demand

Consumer demand refers to the desire of consumers to purchase goods and services. The video highlights that the property crisis and the consolidation of banks could negatively impact consumer demand by reducing the availability of credit to households, which is essential for maintaining economic growth.

💡Skillshare

Skillshare is an online learning community mentioned in the video as a sponsor. It offers a wide range of classes led by industry experts in various fields, such as design, film, and productivity. The video script uses Skillshare as an example of how online learning can be utilized to develop skills, including those needed for setting up an e-commerce business.

💡E-commerce

E-commerce refers to the buying and selling of goods and services, or the transmitting of funds or data, over an electronic network, primarily the internet. The video script mentions the challenges of setting up an e-commerce business and how online learning platforms like Skillshare can provide the necessary education to overcome these challenges.

Highlights

The Chinese economy is facing a slow-burning property crisis which is impacting the banking system.

Banks are under stress due to falling land and property prices.

The CCP has been using ad hoc measures to support smaller, vulnerable banks.

A new strategy involves the consolidation of smaller banks into larger ones, with 40 banks being absorbed in late June alone.

China's banking system consists of three layers: mega banks, province level banks, and rural banks.

The 'big four' banks in China are the largest in the world by assets.

State ownership in these banks ranges from 60% to 90%, with the CCP having controlling stakes.

Rural banks play a crucial role in providing credit to citizens in the countryside and are more focused on household lending.

The ongoing property crisis has strained the balance sheets of rural banks due to falling property prices and increased defaults.

Local governments have traditionally bailed out failing regional banks, but this is no longer viable due to their own financial stress.

Consolidation of banks is moving China towards a more centralized state-led banking model.

The banking system consolidation might exacerbate China's deflationary woes by reducing household purchasing power.

China is currently struggling with weak consumer demand, indicated by low and sometimes negative inflation rates.

The shift from smaller to larger banks could increase China's export capacity, which has global political implications.

Skillshare is highlighted as a resource for learning web development and e-commerce to set up an online store.

Skillshare offers a wide range of classes for creatives, including courses on business, productivity, and digital marketing.

The first 500 people to use the provided link will receive a one-month free trial to Skillshare.

Transcripts

this video is brought to you by

skillshare as you probably already know

for the past few years the Chinese

economy has been struggling with a slow

burning property crisis however

something you might not be aware of is

the property crisis's impact on the

country's banking system which has been

showing signs of stress as Banks try to

cope with falling land and property

prices while the CCP had until recently

relied on ad hoc measures to keep

smaller more vulnerable Banks afloat a

new strategy has since emerged an

unprecedented number of smaller banks

are now being absorbed into larger ones

with 40 Banks about 1% of all rural

Banks being Consolidated in just the

last week of June so in this video we're

going to have a look at China state-led

banking system how it's been affected by

the property crisis and how this might

exacerbate China's deflationary

wo before we start if you haven't

already please consider subscribing and

ringing the bell to stay in the loop and

be notified when we release new

videos to understand this story you need

to know a bit about China's banking

system broadly speaking China's banking

system can be split into three layers at

the top you've got a handful of

absolutely enormous Mega Banks the best

known of these are the so-called big

four the Bank of China the China

construction Bank the Industrial and

Commercial Bank of China and the

agricultural Bank of China although

sometimes this list is expanded to

include the bank of communications

according to standard and poor the big

four are the largest four banks in the

world by assets with the Industrial and

Commercial Bank holding assets

representing nearly double that of JP

Morgan the largest non-chinese bank in

the world all of these are considered

state-owned in so far as the CCP has

controlling Equity Stakes of between 60

and 90% in each of them and they

collectively account for more than half

of all banking activity in China these

Banks mostly service big companies or

local governments and they're subject to

constant supervision and oversight by

the CCP beneath this layer of national

Mega Banks you've got a network of

smaller Province level banks that are

often closely affiliated with the

relevant local government these banks

are still pretty big by normal standards

because well most Chinese provinces are

the sides of European countries and

account for roughly a third of all

banking activity but then beneath these

provincial Banks you've got a final

layer of something like 4,000 small

rural Banks dotted across the Chinese

Countryside these Banks don't hold that

much in assets they account for only

about 15% of all banked assets but they

play a crucial role in getting credit to

the hundreds of millions of Chinese

citizens that still live in the

countryside they're also more focused

than the other larger banks on lending

to households because bigger banks are

generally more focused on lending to

companies which means that these smaller

banks are more important to creating and

maintaining consumer demand these banks

are also more fragile than their larger

equivalents both because they don't have

as Deep Pockets but also because they're

subject to less regulatory oversight so

they often engage in riskier lending

practices unsurprisingly China's ongoing

property crisis has strained these

bank's balance sheets it's hard to find

precise figures but a large fraction of

Banks lending will have been to property

developers and mortgage holders as

property prices have fallen both

developers and households have stopped

taking out loans and mortgages

respectively while the number of

defaults has spiked meaning less lending

and less cash coming in for banks on top

of that provincial and Regional banks

have lent significant amounts to local

governments via local government

financing vehicles or lgf fees in

practice this means they lend money to

local governments while using long-term

leases for land that's owned by local

government as collateral however as

property and land prices have fallen the

value of these Banks assets have

declined putting further strain on their

balance sheets now in the past local

governments would bail out failing

Regional banks with so-called special

purpose Bonds in practice this basically

just meant that the relevant local

government would borrow money and then

buy up any non-performing or toxic

assets on the bank's balance sheets

essentially Shifting the risk from the

small fragile Bank to the big stable

local government however this is no

longer a tenable solution for two

reasons first local governments can't

borrow as easily as they used to this is

in part because Beijing has become

increasingly anxious about local

government's growing debt burdens and

have therefore put in place measures to

limit how much they can borrow but it's

also because local government's own

balance sheets have been strained by the

property crisis local governments have

already taken out massive debts trying

to meet the growth targets set by

Beijing but as land prices have fallen

their borrowing costs have spiked and

made their debt crisis much worse local

governments are now in so much trouble

that Beijing has had to bail some of

them out and banned others from

borrowing more money which means they

don't have the fiscal space to bail out

these smaller Banks this is why instead

they're being absorbed into larger banks

with more oversight from the CCP in

leing for instance 36 failing smaller

Banks were merged into one provincial

level Bank set up by the CCP called the

leing rural Commercial Bank and five

smaller institutions have been set up to

do similar things in other provinces now

to be clear China's banking system is

nowhere near a 2008 sty Financial

meltdown nonetheless the extent and pace

of consolidation in the past few days

suggests two things first that Chinese

Regional banks are in more trouble than

most analysts might have previously

assumed but second that China is moving

away from the current fragmented

Regional banking model towards a more

centralized State LE model but while

this might reduce the risk of further

bank failures it could still have a

negative impact on China's ongoing

deflation crisis for context for the

past few months China has been

struggling with weak consumer demand

manifest as conspicuously low inflation

rates which has occasionally slipped

into negative territory I.E deflation

the most recent data which came out

earlier this week wasn't particularly

encouraging in this respect year-on-year

consumer inflation came in at just 0.2%

in June lower than the 0.3% high reached

in May and the 0.4% forecast by

Bloomberg while low inflation might

sound pretty lovely in China it's demand

driven rather than Supply driven I.E

it's not a consequence of over Supply

but rather of weak consumer demand

because Chinese households are

struggling with falling house prices low

wages and economic uncertainty folding

smaller rural Banks into larger ones

could exacerbate this problem and

increase the risk of a Japan style

deflationary crisis because as we

mentioned those smaller banks are more

focused on lending to households while

bigger banks in China are generally

focused on lending to companies

including the export Le manufacturing

that dominates Chinese industry this

means that shifting from smaller Banks

to larger ones could further reduce hous

olds purchasing power while even

potentially increasing China's export

capacity which has become increasingly

controversial in global politics running

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