Sunday, April 5, 2020

More Bank Runs Worry Chinese Regulators, Investors

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News Analysis

Warning signs are flashing all over China’s banking sector.

Chinese regulators have seized or bailed out lenders at an unprecedented pace amid a surge in bad debt, while forcing banks to step up lending at increasingly lower interest spreads. That keeps banks in business, but it’s not a recipe for future longevity.

Increasing worries about the health of China’s financial system have hit investor confidence in banks and hurt recent capital raising efforts as well.

I wrote in August that after three Chinese bank bailouts in three months, more would follow. After a few months of calm, two local bank runs in November have added fuel to the fire.

Yingkou Coastal Bank is the latest to suffer a bank run. Yingkou faced a “flash mob” of customers who feared that the bank was on the verge of collapse. The Liaoning Province-based bank stacked bundles of yuan notes behind the counters of its branches in a show of confidence in the face of customers lining up to withdraw, according to a Reuters report. Local government officials also were sent to bank branches to calm customers and promise that the bank had sufficient liquidity.

The state bailout of Inner Mongolia regional lender Baoshang Bank earlier this year sparked a string of small bank bailouts, including Hengfeng Bank Co. and Bank of Jinzhou.

Yingkou had to sweeten financial incentives to entice its customers to stay. “To help repair the damage, Yingkou hiked its already high deposit interest rates,” Reuters reported.

The latest crisis followed an earlier November bank run at Henan Yichuan Rural Commercial Bank, a small bank based near Luoyang, in Henan Province.

Several Bank Runs in 2019

Yingkou’s crisis couldn’t have come at a worse time.

Small banks have become more dependent on deposit customers after Baoshang’s shocking bailout earlier this year sent interbank interest rates soaring. That means short-term funding for small banks became too expensive, and banks had to increasingly rely on customer deposits for funding.

When Baoshang Bank was taken over by Beijing regulators in May,…

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