How China’s Banking Crisis Could hit the World

How China’s Banking Crisis Could hit the World
China’s economy is struggling at the moment, and has been for a while. So in this video we look at the latest looming issue, China’s banking crisis. It’s small at the moment, but it could eventually impact the entire world.

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the last few days various regional banks
in china have essentially run out of
money leaving customers unable to
withdraw their funds as you might expect
this has led to widespread unrest with
large protests something fairly unusual
for china occurring in the central
province of hennon so let’s take a look
at the current crisis some of the
reasons behind it and whether things
could be getting worse for china’s
banking sector
[Music]
let’s start with the hennan protest
though the cracks first started showing
here in april when customers of forehead
and banks were told that they wouldn’t
be able to withdraw their funds now as
you might expect when other customers
heard that their deposits were at risk
there was a massive run on the banks
with everyone immediately demanding
their money and after weeks of being
unable to withdraw their deposits the
protests came to a head on sunday of
last week with thousands of protesters
gathering in the capital the process
were duly shut down by the chinese
authorities who subsequently blamed the
crisis on quote criminal gangs
unfortunately for ordinary hennan
residents though the regional banking
authority has since said that not all
depositors will get their money back
which means that future protests are
very possible but why are we making a
video on a relatively small protest in
central china well it’s because what’s
happened in hennen might not be an
isolated incident as we’ve detailed in
previous videos china’s property market
is currently experiencing a bit of a
slowdown chinese house prices are by far
and away the most expensive in the world
your average house in shenzhen for
example costs over 40 times the median
salary and three times that of houses in
london chinese developers therefore
raced to profit off this and have been
borrowing ridiculous amounts of money to
fund these building projects worried by
spiraling debt burdens and what was
beginning to look like a massive bubble
the ccp introduced their infamous three
red lines in september last year which
essentially tried to limit how much
developers could actually borrow now
this made life pretty much impossible
for chinese property developers who
relied on debt to keep them afloat which
is why a whole load of them including
evergrand have since defaulted on both
foreign and domestic loans and as a
result moody’s has downgraded 91 chinese
developers this year alone compared to
54 over the previous decade
to make things even worse house sales
and prices have fallen across the board
in china affecting every big developer
there have even been reports of home
buyers across the country refusing to
pay their mortgages in process to the
fact that developers have been unable to
complete their houses on time and for
context it’s common practice in china to
buy a house before it’s even been built
which gives you a sense of how intense
the property market has been
anyway this has all been terrible news
for banks especially smaller ones which
often engage in riskier lending
practices it’s hard to find precise
figures but a large fraction of banks
lending will have been to property
developers and to people taking out
mortgages so with property developers
defaulting on mass and customers
refusing to pay back their mortgages
banks will be seeing far less money
flowing into their coffers in fact
bloomberg has estimated that the total
cost of these mortgage refusals could
come to 83 billion dollars and while
that doesn’t sound particularly bad when
you remember that china’s total lending
from domestic banks is literally in the
tens of trillions of dollars it’s still
enough money that chinese authorities
have allegedly been holding emergency
meetings with the affected banks now we
should say that so far the banking
crisis has been limited some small
regional banks who always have a higher
than average default rate and a wider
economic collapse does still look
unlikely however the point we’re making
is that this falling confidence in the
banking sector when combined with a
collapsing property market and china’s
uniquely high debt levels could pose a
serious problem for the ccp in the
future it’s also worth noting that
sources have told the scmp that a
similar crisis could be emerging in
another province in northeastern china
which suggests that the conditions that
cause the bank run in henan could be
more common than they currently seem
again to reiterate this hasn’t
materialized yet and the ccp will
probably just step in before anything
catastrophic happens but china’s
continuing economic woes demonstrate how
difficult it will be for the ccp
to deflate various debt bubbles in the
chinese economy as a final thing any
anxiety that the ccp might have had
around this issue has been exacerbated
by china’s recent growth figures which
came out far lower than expected china’s
gdp grew by just 0.4 percent in the
second quarter of this year well below
the 1.2 percent forecast by economists
and down from the 4.8
recorded in the first quarter chinese
gdp would probably have contracted even
more if it weren’t for a massive
increase in government stimulus which
has caused a 600
increase in the national budget deficit
when compared to last year this slowdown
was largely caused by china’s ongoing
covet struggles which we’ve covered in
more details in other videos on the
chinese economy but currently 31 chinese
cities are under full or partial
lockdowns according to analysis released
this week by a japanese investment bank
with these lockdowns affecting 247.5
million people in regions accounting for
more than 18
of the country’s total economic activity
both shanghai and guangdong have seen
rising case numbers
and further lockdowns now look even more
likely ultimately china’s wider economic
struggles will make it even more
difficult for the ccp to pursue its
structural economic reforms which
basically involved deflating various
bubbles and trying to create more
domestic consumption within china which
in turn would reduce its reliance on
exports it’s also pretty bad news for
the rest of the world both because weak
chinese growth will have knock-on
effects on the global economy and
because lockdown related supply chain
disruptions are only exacerbating global
inflation which is bringing down
standards of living in developed
countries and causing political chaos in
developing ones ultimately though this
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