First bank runs in China reported today may signal the start of an old fashioned banking crisis

Posted on 25 March 2014 with no comments from readers

There have been runs on two small banks in China with depositors fighting to get through the doors to make withdrawals when they opened. Is this the first crack in the great wall of Chinese credit?

Reuters reported local news about queues outside the Sheyang Rural Commercial Bank in Yancheng yesterday and the Rural Commercial Bank of Huanghai faced similar rushes by depositors today after rumors of insolvency at Sheyang. Officials say it is impossible for a Chinese bank to go bankrupt.

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However, financial institutions have made large loans to private and state developers whose project lie abandoned and their loans cannot be repaid. Where are the banks to find the money to pay out to depositors who want to withdraw their money?

Observers said the situation highlights the urgency of plans to put in place a deposit insurance system to protect investors against bank insolvency, so the cast-iron banking system may not be as strong as it seems.

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Unregulated rural cooperatives are, nonetheless, admitted to be a weak and unregulated part of the credit system.

The obvious comparison is with the ‘too big to fail’ banks of the West which suddenly became insolvent in the subprime crisis of 2008. Is this the Chinese version of the Northern Rock bank run that hit the UK in 2008, another country whose assurances that bank runs were a thing of the past proved nonsense.

First default

This month China allowed its first ever commercial bond default at Chaori Solar Energy and a heavily indebted developer in Zhejiang province is at risk of defaulting on $565 million in loans, according to local media.

China watchers reckon this is a part of a controlled implosion of the credit system and will not be allowed to spiral out of control like Lehman Brothers in 2008. Well they would say that wouldn’t they?

Good intentions are one thing. Fulfilling them may be a different matter. Did the Federal Reserve not think it had events under control in 2008? Perhaps China will surprise us all. But bank runs are not a good sign. Is this why the Chinese bought more than 2,000 tonnes of gold last year?