Amid calls from delegates to the Communist Party’s “two sessions” to establish special regulations on the bankruptcy of financial institutions, the world has only just discovered that Baoshang Bank, which had been a prominent player in the banking industry for two years, has been declared bankrupt in a low-profile manner after being officially taken over.
According to the 21st Century Business Herald, a number of deputies from the Communist Party’s central bank recently proposed at the “two sessions” that China should set up special regulations for the bankruptcy of financial institutions.
According to the report, Bai Hexiang, president of the Guangzhou branch of the People’s Bank of China, who is also a deputy to the National People’s Congress, cited the bankruptcy of Baoshang Bank as an example, pointing out that the current Chinese “enterprise bankruptcy law” has only principle provisions for the bankruptcy of financial institutions, and there are still many shortcomings, and the authorities should consider enacting a special “bankruptcy law for financial institutions The authorities should consider enacting a special “financial institution bankruptcy law” to improve the market-based exit mechanism of financial institutions. Guo Xinming, president of the Nanjing branch of the People’s Bank of China, and Yin Xingshan, a member of the National Committee of the Chinese People’s Political Consultative Conference and president of the Hangzhou central branch of the People’s Bank of China, suggested that a special chapter on “bankruptcy of financial institutions” be established in the “Enterprise Bankruptcy Law”.
The report reveals that on February 7 this year, the Beijing First Intermediate Court has ruled that Baoshang Bank is bankrupt. The ruling pointed out that Baoshang had no production and no employees before the application, and was obviously “insolvent” and had no actual solvency. At this point, Baoshang Bank, which has been regulated by the China Banking and Insurance Regulatory Commission and the central bank for nearly 2 years, is officially bankrupt.
According to public information, Baoshang Bank was formerly known as Baotou City Commercial Bank, which was established in 1998 and changed its current name in 2007, and has since expanded its business significantly, with branches in Beijing, Shenzhen, Chengdu and Ningbo.
On May 24, 2019, Baoshang Bank was jointly taken over by the Communist Party’s central bank and the Banking and Insurance Regulatory Commission due to serious credit risks. In June of the same year, the receivership team of Baoshang Bank announced that it would carry out asset and liability inventory, account cleaning, value revaluation and capital verification of Baoshang Bank.
At the end of April 2020, Monshang Bank was formally established and announced its opening. The authorities also announced that the relevant business assets and liabilities of Baoshang Bank would be transferred to Monshang Bank and Huishang Bank, respectively.
The results of the asset verification show that in the 15 years from 2005 to 2019, the “Tomorrow System” has registered 209 shell companies and taken credit funds in the form of 347 loans, forming an account of 156 billion yuan, all of which have become non-performing loans, with annual interest of up to 10 billion yuan.
Regulatory filings from Baoshang Bank, a small regional bank based in Inner Mongolia, showed a profit of 600 million Australian dollars in 2017, the Australian Broadcasting Corporation cited. With assets of about A$90 billion, Baoshang Bank had a capital buffer that could easily meet the global needs of a Tier 1 bank, the report said. Yet it collapsed.
The Australian broadcaster described the collapse as “rare” and “unheard of”.
Bank failures in China are indeed rare, but since 2020, not only has Baoshang Bank entered bankruptcy proceedings, but Yuyang Agricultural and Commercial Bank and Hengshan Agricultural and Commercial Bank in Yulin, Shaanxi province, have also been reorganized. Runs on Yinchuan Agricultural and Commercial Bank in Luoyang, Yingkou Bank in Liaoning, Bank of Gansu, Yangquan Commercial Bank in Shanxi Province and Baoding Bank in Wangdu County, Hebei Province, have caused concern.
Chinese banks have poor asset quality and high bad debt ratios, so the risk of a run naturally increases. Shenzhen, Zhejiang and Hebei have been piloting a reservation system for large deposits and withdrawals since July last year to prevent a run, a move that has undoubtedly added to people’s fears that they will have difficulty withdrawing their hard-earned savings due to various problems.
According to a March 2020 estimate by analysts at UBS, assuming that China’s GDP growth rate remains at 4.8% in 2021 and 70% of bank loans default on their debts, the scale of bad debts in the overall banking industry will fear an additional 5.2 trillion yuan, or about $743 billion.
Some analysts say that behind the spike in bad debts in China’s small and medium-sized banking sector, China’s huge corporate debt, local debts and even household debts have gone wrong.
According to Wang Jian, a senior Chinese financial media figure, China’s total debt as of the first quarter of 2020 was 580 trillion yuan, about 5.8 times the GDP of last year. Among them, corporate debt is 259.3 trillion, government departments have debt of 40.5 trillion and residents’ debt is 57.7 trillion.
As of the first quarter of 2020, a total of 31 companies with debts over $5 billion went bankrupt, involving $932.3 billion in debt; another five banks thunderstormed or were taken over, involving a total of $2.6 trillion in debt.
Since 2020, Chinese residents’ mortgage and car loan repayments have soared in a climate of corporate closures and waves of unemployment, while consumer delinquent receivables have doubled from five years ago to a total of RMB 2.8 trillion.
In terms of government debt, the Financial Times reported that 831 local governments in China were listed as “defaulted executors” by the courts in the first 10 months of 2019, after defaulting on payments to contractors. Compared to the end of 2018, there were only 100 defaulting local governments. The number of local government default cases is rising rapidly.
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