More cracks appear in the Chinese banking system11 July, 2012, 17:30. Posted by Zarathustra
Chinese banks shares have been hit today on the stock market, led by China Construction Bank (CCB), which fell by 2.95% in Hong Kong on the news that it is the biggest lender to Zhejiang Zhongjiang, which is going bust. Interestingly, three months ago we had a brief mention of Zhongjiang when one of its subsidiaries, Jinxing Property, filed for bankruptcy.
This is another case that the risks in the shadow banking system of China is feeding into the formal banking system. Yicai reports that CCB was the biggest creditor of the company among the formal banking peers, which included Bank of China and ICBC. The total debts outstanding for the company amounted to RMB8 billion, with RMB3 billion borrowed from CCB, RMB1 billion from Bank of China and RMB150 million from ICBC. The company, as the name suggests, is based in Zhejiang, one of the places where the informal lending mess is concentrated in as we mentioned.
The company started to show sign of troubles last year as they invest heavily into real estate businesses. As formal banking tightened credit last year when the central tightened monetary policy, the company started relying on loan sharks and other informal sources of fund with much higher borrowing costs. As the economy slows, the company finds itself cash strapped and unable to service its debts. The role of CCB is interesting because it was the only bank that seemed to have ignored the fact that Zhongjiang has been in trouble. While other banks tightened credit to the company, CCB was the only bank that continued to lend, including issuing wealth management products to customers to finance Zhongjiang.
|By Etuscandy (Own work) [CC-BY-SA-3.0], via Wikimedia Commons|
Of course, the size of CCB’s loan bank amounted to RMB6.83 trillion, thus the loans to Zhongjiang only represent a minuscule amount of total lending outstanding, and the impact of the bankruptcy of this company on the bank is negligible. What is not negligible is the potential size of the problem in the formal and shadow banking systems. As the economy slows much more rapidly and because many companies are highly indebted (borrowing both from the formal and shadow banking systems, while the two systems are intricately linked), we could easily see more problems of this nature coming up.