Why are So Many Chinese Banks Disappearing?
Summary
TLDRThe 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
- đŠ 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.
- đ 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.
- đą 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.
- đ 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.
- đ Small rural banks, although they hold less assets, are crucial for providing credit to rural populations and maintaining consumer demand.
- đ 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.
- đ As property prices fall, both developers and households are defaulting on loans, leading to less lending and cash flow for banks.
- đ« 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.
- đ The shift from local government bailouts to bank consolidations indicates a move towards a more centralized state-led banking model in China.
- đ However, this consolidation could potentially reduce household purchasing power and increase the risk of a deflationary crisis similar to Japan's experience.
- đ 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
đŠ 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.
đ 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.
Mindmap
Keywords
đĄChinese Economy
đĄProperty Crisis
đĄBanking System
đĄMega Banks
đĄRural Banks
đĄConsolidation
đĄLocal Governments
đĄDeflation
đĄConsumer Demand
đĄSkillshare
đĄE-commerce
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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