China’s central bank on Monday said that China’s banking sector is “showing signs of strain”. More than 13% of 4,379 lenders now considered “high risk” by the central bank.

A few weeks ago China’s Henan Yichuan Rural Commercial Bank suffered a vicious bank run. Nationalizations of Baoshang Bank, Bank of Jinzhou, and China’s Heng Feng Bank took place right before that. Yet another Chinese bank has found itself scrambling to prevent a collapse: Yingkou Coastal. What is the reason why so many Chinese banks have found themselves either getting bailed out or hit by bank runs? China’s interbank/repo rates have surged amid growing counter-party concerns. More banks have to rely on deposits to fund themselves. Meanwhile, cuts in key lending rates have only exacerbated net interest margin pressures on banks. As Bloomberg reports in its 2019 China Financial Stability Report, the high-risk category contains 586 banks and financing firms.

The PBOC stress-tested 30 medium- and large-sized banks. In the base-case scenario, nine out of 30 major banks failed and saw their capital adequacy ratio drop to 13.47% from 14.43%. In the worst-case scenario, more than half of China’s banks, or 17 out of the 30 major banks failed the test. Separately, a liquidity stress test at 1,171 banks, representing nearly three-quarters of China’s banking sector by assets, showed that 90 failed in the base-case and 159 in the worst-case scenario.

So with the entire Chinese financial system roughly $40 trillion, this suggests that China now has a rather insurmountable $20 trillion problem on its hands. Please recall that the 4 largest banks in the world are now Chinese: ICBC: $4TN; China Construction: $3.4TN; Agri Bank of China: $3.3TN; Bank of China: $3.1TN.

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