Tariffs Add to China's Banking Bust
While Americans contemplated Jeffrey Epstein’s demise, Chinese authorities had more pressing matters as the country’s third bank was bailed out late last week. HengFeng Bank with $200 billion in assets fell into the hands of “Central Huijin Investment, a subsidiary of the China Investment Corporation that acts as the Chinese government’s shareholder in the country’s four biggest banks,” according to a brief report overnight by Shanghai Securities News, published by state news agency Xinhua and cited by Zero Hedge.
Prior to HengFeng, Bank of Jinzhou was propped up using “state-owned strategic investors,” according to Dai Zhifeng, analyst with Zhongtai Securities Co.
In plainer terms, Zero Hedge reports ,
“The latter approach is more market-oriented and showcased the determination of regulators to resolve problematic banks, while injecting confidence into the market,” Dai said, although when stripped of all the pig lipstick, what just happened in China is that another major bank, one with $100 billion in assets, just collapsed and received a government-backed rescue.
China’s banks hold $30 trillion in deposits according to Alexander Campbell, more or less double the amount of aggregated U.S. bank deposits. Campbell was pitching Alex Rosenberg on Real Vision on his thesis of buying gold in Yuan terms with the idea that bank bailouts take a flood of central bank created fiat money to paper over. So while the Chinese may want to keep the Yuan near the 7 to the dollar range, bank busts are just beginning in China and 7 may become a distant memory.
Campbell’s view is,
Bank of Jinzhou just went under, Baoshang went under. They're providing liquidity while trying to take out the small guys.
There's some big guys coming up. Industrial Bank looks fine. But by all of our metrics, it's the sketchiest big bank. Minsheng is not that far behind them. If you start to get those banks under question, the liquidity that they have to provide to offset the deleveraging, the negative liquidity from bank runs will be so big that I think the question of do you want to keep seven is obvious. And you say, no, who cares? Like, let's have it go down. And let's stimulate the economy. I think the cruxy thing, and the thing for the trade then is will do we print money as well?
China’s rural banks have classified loans totaling 4.1% which may not sound bad, but is the equivalent of circling the drain in the fractionalized banking world. ZH cited a JP Morgan report downgrading Chinese banks.
The J.P. Morgan economics team revised down its GDP growth forecast for 2020 by 0.1ppt due to the recent sharp turn in Sino-U.S. trade negotiations. But even prior to that, declining PPI and industrial profits growth, suggesting declining debt-servicing ability and weakening cash flow for Corporate China, increase the risks that banks will be asked to support macro growth at the potential expense of profitability. Recent official PBOC comments on an accelerating interest rate liberalization process are illustrative of such rising risks.
Meanwhile, Donald Trump is thrashing China with tariffs. In a piece for Bloomberg, Stephen Mihm compared Trump’s tariffs with the bad old days of Smoot-Hawley and the failure of Austrian bank, Credit-Anstalt, and the European liquidity crisis which followed.
While FDR finally backed off, Mihm, doesn’t believe Trump will. “Donald Trump is no FDR,” he writes. “Trump isn’t going to get religion and suddenly work for international cooperation on trade and currency before things go off the rails. He’s going to stay the course.”
China will have no choice but to let the Yuan sink versus the dollar as “Beijing has found itself paralyzed and with zero credibly options how to kickstart the economy,” writes ZH.
“The only thing that's left is for China to admit that this is indeed the case, so sit back, relax and watch as bank after bank on the list above fails and China's financial cancer spreads across the country with the $40 trillion in assets (which is certainly not bad news for either gold or Bitcoin).”
When Trump talked about winning, he must have been talking about holders of the yellow metal and its crypto cousin.