
Baoshang collapse threatens China's economy, may trigger central bank response - ohiovr
https://mobile.abc.net.au/news/2019-06-28/baoshang-bank-collapse-hits-lending-threatens-chinese-economy/11252022
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cs702
The global wave of bank failures in the Great Depression was triggered by the
seeminly unimportant collapse, in May 1931, of a bank in Vienna,
Creditanstalt, which was tiny in relation to the size of the global banking
system.[a][b][c] Similarly, in 2008, global credit markets froze after the
failure of one investment bank, Lehman Brothers.[d]

A single bank failure can have enormous consequences, given the interconnected
nature of banking systems. If one bank is unable to pay money owed to other
banks, those banks might be unable to pay money owed to yet other banks.

According to the article, "banks in China are facing a pinch of liquidity,"
i.e., they're telling other banks to whom they owe money that they can't pay
right now, but this is only a temporary "pinch."

[a]
[https://www.bis.org/publ/work333.pdf](https://www.bis.org/publ/work333.pdf)

[b]
[https://www.jstor.org/stable/3133667](https://www.jstor.org/stable/3133667)

[c]
[http://eprints.lse.ac.uk/87151/1/wp274.pdf](http://eprints.lse.ac.uk/87151/1/wp274.pdf)

[d]
[https://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothers#...](https://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothers#Impact_of_bankruptcy_filing)

~~~
onlyrealcuzzo
Unrelated, but you seem to know a lot about this, and I've been trying to
track down an answer for months, so I'll ask.

I notice that China's M2 is $27.52T -- which is roughly equal to the US and
the EU combined (ditto for M3). Considering China's real economy is roughly a
quarter of the size of the US and EU combined, how can it sustain such a high
M2?

I ask on the tangent that it seems like China has ridiculous amounts of cash
to GDP, so it seems like defaults should be extraordinarily rare.

~~~
cs702
I don't fully understand how China works as a country and economy:

* It is not a democracy.

* Citizens lack certain social freedoms that people in other developed countries take for granted.

* Properly speaking, it is not a capitalist system, as there is a lot of investment, including by state-owned enterprises, that seems uneconomic (extreme example: ghost cities).

* According to numerous media reports, its financial system has been plagued by bad loans for many years, so far without consequence (a quick Google search for "China bad loans" can verify it).

* Its national accounting figures (e.g., GDP) are reportedly "managed" (or less charitably, cooked) and therefore cannot be taken at face value.

* Its money supply, e.g., as measured by M2, appears to be much greater than levels that would be considered ludicrous in other developed economies.

It remains to be seen whether this latest "pinch" of liquidity in the banking
system is the proverbial canary in the coal mine.

~~~
baybal2
> I don't fully understand how China works as a country and economy

I don't think that anybody, or even the head of Chinese central bank himself
knows how Chinese economy works, except for the fact that it does.

When I lived in Canada, I shared apartment with a power couple from Beijing: a
central bank worker, and a former Huawei senior engineer (though both were
from Shaanxi originally.) A girl who worked in the central bank for her entire
career were telling that just understanding everyday workings of the system
was beyond PBOCs most senior analysts, giving the example of how PBOC took
years to trace missing billions of rural lending cooperatives that went bust
mid nineties, or how the entire PBOC analysis and statistics wing was unable
to calculate country's real current account changes with any level of
certainty.

~~~
ethbro
Garbage in, garbage out.

While Enrons happen, a fundamental aspect of Western-style accounting is
legally-mandated transparency (at least to someone, somewhere).

Without a standards-based legal system, what's to stop anyone from cooking the
books?

And if every ledger is a lie to some degree, then aggregating those just
produces bigger lies. Until you're finally left with the "unable to calculate
[...] with any level of certainty" answers to a host of important economic
questions.

Sounds familiar from the 1980s...

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fspeech
Why is this being treated as news as of now? Note the article chose to not
mention a timeline or give any background at all. This bank was taken over on
May 24 this year, with a very public announcement. Its purported major
investor was arrested in 2017. The bank has not published an annual report
since then. For details see:
[https://zh.wikipedia.org/wiki/%E5%8C%85%E5%95%86%E9%93%B6%E8...](https://zh.wikipedia.org/wiki/%E5%8C%85%E5%95%86%E9%93%B6%E8%A1%8C)

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pertymcpert
TFA and other news aren't reporting the takeover. There's some recent
additional reports coming out now of the effects the takeover had on liquidity
in the interbank markets.

~~~
fspeech
This was the first default in the interbank market so it broke the implicit
credit guarantee in the interbank market. So this is a reform that is long
overdue but they have to start from somewhere.

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baybal2
In China, there seem to be no moral boundary in between just any legit banking
business, and the most crazy high finance tricks being done with creditors
money.

Moreover, I think most of local bankers think that's just the way it should
be, thinking "boring Western style banking is just not for the high flyers
like us"

Few things to tame out of this:

1\. In China, a model bank can fail overnight

2\. Central bank totally missed a sum on order of tenths of billions in cash
being moved under it nose

3\. All "good on paper banks" (which means all of them, given that is China)
are under doubt now

4\. Nobody knows how to tell of real risk indicators as Chinese banker got
ungodly good with hiding elephants in their balance sheets

5\. The alleged "private project" of a banker that has failed was a "risk
free" real estate project.

6\. Big banks will grow even more wary of lending to small banks with no
diversity in leadership. In a big bank, you can at least be sure if 1 GM out
of thousands does this, at least 1 another GM out of those thousands will try
to impede him, but that's not the case with "1 man banks" which nearly all non
big four banks are (which themselves evolved out of failed ITICs that were ran
by party cadres
[https://zh.m.wikipedia.org/wiki/广东国际信托投资公司](https://zh.m.wikipedia.org/wiki/广东国际信托投资公司))

~~~
mrunkel
> In China, there seem to be no moral boundary in between just any legit
> banking business, and the most crazy high finance tricks being done with
> creditors money.

How is this a "chinese" problem? The recent sub-prime loan bullshit took place
in the US and almost sank the global economy.

The bond pricing fixing took place in the UK and cost investors billions.

This is endemic to banking globally. The only thing that seemed to help was
Glass–Steagall in the US which of course, banks got repealed because it worked
too well.

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wbl
Could you please point to the entity whose collapse in the GFC Glass-Steagall
would have prevented?

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zakum1
They are called a “smallish lender” - their balance sheet is $90 billion. We
are truly in an age of mega systemic banking risk.

~~~
mytailorisrich
I believe that the figure for JPMorgan is in the trillions.

$90b is not that much for the financial system of a large economy.

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HeWhoLurksLate
At one point, JP Morgan had more money (and power) than the US government, so
that is not surprising.

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miketery
Maybe it had greater assets under management, that doesn’t translate to power
or direct ownership. They are custodians and facilitators. Their worth is
traded on NYSE and doesn’t exceed top internet companies, who imo have more
power.

~~~
HeWhoLurksLate
Sorry, I _should_ have put a date on there. I was referring to the era right
before the Great Depression.

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NTDF9
Can someone explain how banks can survive if there is no demand for loans?

Let's say an economy is fully saturated and content and doesn't desire more
loans, do banks collapse in such a case?

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thatguy0900
I'd be willing to pay a fee to the bank to hold my money for me. That's a
useful service. Or they could take some fee off a debit card every time it's
used. I can't imagine many people would rather keep all their money at home
rather than pay a bank to hold it for them.

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A2017U1
They can't possibly do that with a bank account though? In the sense that a
collapse would see you get cents in the dollar back, hopefully the taxpayer
pays the rest if you are lucky.

You can pay them for a safe deposit box and they can properly _hold_ your
money if you want, but that money won't be worth much in 30 years.

Unless I'm wrong and some banks provide a fully backed savings account? Doubt
it would be worth the effort for them.

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gruez
>You can pay them for a safe deposit box and they can properly _hold_ your
money if you want

Depends on what your threat model is. A safe deposit box is safe from bank
collapses/bail ins, but not against theft.

>but that money won't be worth much in 30 years.

In that case you'd probably be stashing gold rather than bills.

>Unless I'm wrong and some banks provide a fully backed savings account? Doubt
it would be worth the effort for them.

because right now there's no demand for it. if there was a period of
zero/negative interest combined with low confidence in banks, I'm sure that
non-fractional reserve banks would pop up. Either that or people stash their
money overseas.

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mhkool
Banks fail sometimes and there is no regulation or risk management system that
can prevent it. To increase protection for clients and economy one could by
law introduce 'bank types' where, for example the type 'low risk' is only
allowed to do transactions with low risk with of course lots of options to
define what 'low risk' is.

~~~
Rebelgecko
Gotta be careful with that. Someone might get the bright idea to combine a
bunch of smaller medium risk transactions to diversify and reduce risk. Then
you end up with 2008 all over again

