This is an article translated by me from https://www.epochtimes.com/gb/22/6/24/n13766965.htm by author Xie Tian.
Xie Tian: To what extent will the bank run in China worsen?
Epoch times, 25th of June, 2022 edition.
The run on the Bank of China has made China’s economy go from bad to worse. With government, business and individual debt exploding, the run on the Bank of China, under the circumstances of the deteriorating economy and the continuous explosion of government, corporate, and personal debts has finally begun to come to light despite the Communist Party government’s cover-up efforts and unwillingness to act. In the near future, their is a possibility of the collapse of the banking industry, the monetary system and China’s economy.
Towards the end of June, the internet put out a video showing one of the top 4 banks of China, China Agricultural Bank, informing depositors that suddenly there is a restriction on withdrawals of 1000RMB per day. Depositors are asking the tellers at the bank, “what law authorizes you to prohibit me from withdrawing more than 1000RMB? What can I do with 1000RMB?” The response is: “it’s not us, its automatically set by the system.”
The Chinese public already started to have doubts about weather their deposits are safe. One netizen asked, “is my money still my money?” Some people also suggest taking their money out and bringing it home and not caring about the banks interest rates.
In April this year, Pudong Bank, Everbright Bank as well as China Agricultural bank have all announced they are reducing transaction limits related to online business for some or all of their customers, including personal online banking, transfers and online payments. Aside from restricting online account payments, many bank depositors are having their withdrawals limited. Recently their are videos coming out of Shenzhen, Shanghai and Dandong of depositors lining up at the bank. Netizens one by one complained of the difficulty of withdrawing money and suspect the possibility of the bank’s funds being tight, worrying about whether their deposits can be withdrawn in the future.
From mid to late April, depositors of many village banks in Henan have encountered problems withdrawing cash. All over China, the funds of depositors are vanishing out of thin air whilst their health scores are inexplicably turned turned red (Chinese citizens must download an app on their phone that displays their health status. A red score excludes them from regular daily activities). The dark mechanisms of the government who are behind the health code cannot help but shock people.
In Shanghai, from the end of the lock-down in June, many banks have been crowded.
Elderly people who receive pensions in Shanghai, rush to the bank at 2 in the morning to line up may still not be able to receive their money. There is no chance for someone arriving at 5 in the morning.
Depositors in Shenzhen told foreign media, that their was signs of an implosion. In June they said one could no long withdraw money from ATM machines — this situation is already a few months old concerning China Construction Bank and China Agricultural Bank where withdrawing cash became inconvenient.
Consumers in mainland China now mainly use online payment, using things like Alipay which transfer money to and from the bank; usually there is no problem with it. However, there have been several instances of failures in transferring money to Alipay and Yu-E-Bao (another payment service).
Official Chinese state media recently indirectly confirmed the occurrence of a wave of bank runs. The Shanghai branch of the Peoples Bank of China on the 20th of June announced, in the first half of June, cash transfers since this time last year have quadrupled. China News Service said on the 1st to the 15th of June, the total cash supply of the Peoples Bank of China has quadrupled since this time last year. But the bank did not specify weather the cash was enough to settle peoples withdrawal needs.
This kind of situation continues to ferment all over China, shattering the confidence of the Chinese public when the most important domain of finance is trust: it is the deciding factor in weather or not a banks bankruptcy or a bank run will happen. Almost certainly, the Communist Party is struggling to prevent a bank run. But to what degree will the bank run worsen? Enough to bring down the Communist party led banking and finance system? Is digital currency able to avert a bank run? These are important questions.
The word “bank run,” in Chinese vividly paints a dramatic picture of a swarm of people frantically scrambling to withdraw their cash. The meaning of the word bank run in the west is to withdraw your cash and run. As for weather its a crowd is not clear. In western society, even if a bank run were to occur, people would still line up in an orderly fashion and not swarm as a crowd. But if the situation is serious enough, civilized behavior will go out the window.
A run on banks occurs when a large amount of the depositors worry that a bank is possibly unable to pay back their deposits or that they cannot withdraw their cash in a timely fashion; so they race to pull their money out. Because it is impossible for banks to keep too many of their deposits, they have already used most of their funds (around 90% of their deposits) for lending. It’s their business to lend to companies and individuals that need capital.
Are bank runs legal? In America, many states at least on paper have laws to to try prevent people from spreading rumors or malicious remarks that could lead to a bank run. These states even legislate the prohibition of people making inaccurate comments about a banks financial health. The problem for China is that the banks lack transparency and government regulation is unclear and often ineffective.
In current society for example, in a developed country like the United States with relatively transparent information, can a bank run still happen? Even with federal government insurance（FDIC/NCUA， if you need a lot of cash urgently, your bank can’t give it to you right away and so there still might be a bank run.
Many people will ask, where will the rich people put their money? Will they have a problem getting their money out? In America, many millionaires and billionaires put their money in mutual funds, or certificates of deposit (CD), commercial paper and US treasury bills. This can also be considered cash because it can be cashed in at anytime. There are some rich people who will take their money and buy short term government securities called treasury bills and upon expiration, quickly buy more, not withdrawing until they need the cash.
Many billionaires will use zero dollar banks accounts at a private bank in order allocate their money into cash or into the above mentioned cash equivalents. When they need to spend money, they will write a check from their zero dollar bank account. It looks like a bad check but the bankers at their private bank will settle daily, and all that has to be done is for the account holder is to sell some short term bonds, mutual funds or CD’s to settle the check they wrote, then their bank account can be kept at zero.
Basically, the very wealthy only keep 1% of their wealth in cash or liquid assets and the rest of their wealth they keep in commercial paper, stocks, bonds, mutual funds and other financial assets. So the wealthy should have no problem with a bank run. The vested interests of the Communist Party and their elites won’t have to worry about a bank run or a bankruptcy.
In Americas history, bank runs have always happened. Not only in the 1930s great depression, even in the 2008–2009 financial crisis their were limited scale bank runs. In 1933 the FDIC (Federal Deposit Insurance Corporation) was born because of the bank runs during the great depression. In addition to bank runs, “silent bank runs” may also occur during large-scale electronic transfers.
Ever since banks appeared in society, so to has bank runs. In 15th and 16th century Europe, goldsmiths would issue paper receipts that would allow people to use them to exchange for gold. When these written receipts exceed their gold holdings, a bank run will occur. The bank runs during Americas great depression started with the stock market collapse. In 1930, the earliest bank run occurred in Tennessee, leading to the first bank to collapse. At the time these things didn’t attract peoples attention as people thought it was an isolated case. But immediately a series of banks in the American south took place causing the news to spread over the whole country. Nationwide bank runs and bankruptcies then started to occur. Rumors came out that a bank in New York may be unable to make ends meet causing thousands of people to line up to withdraw their cash, and within a few hours 20 million dollars was withdrawn, leading to the bankruptcy of 4000 banks.
During the 2008–2009 financial crisis in America, Washington Mutual Bank was still Americas 6th largest financial institution but on September 2008, the US Treasury OTS Department shut down. Within a few days, depositors withdrew $16.7 billion worth of funds, making the banks cash reserve dry up. On the second day, Wachovia Bank also encountered the same issue where within two weeks, 15 billion was withdrawn.
Over the past 500 years, every country has experienced the pervasive issue of bank runs. Ever since the year 2000, there’s been Argentina (2001), Myanmar (2003), America with the sub prime mortgages crisis (2007), England (2007), Switzerland (2011), China Yancheng Sheyang Rural Development Bank (2014), Bulgaria (2014), Greece (2015), Canada (2017) and most recently Englands Metrobank (2019); all who have experienced bank runs.
In that case, to what degree will Chinas bank run will worsen? The possibility of a larger scale bank run, as we can see today, is increasingly likely. The foolish policy of the Communist party has been to cover up and shutdown, but the more they do it, only the more will the panic increase, making the scale of the bank run worse. When 10% of depositors go to withdraw money from the bank, the communist authorities will definitely not be able to provide the funds; and even if the party resorts to means of suppression, coercion, arrest, and silence, it would not help, because no one would be ok with seeing their savings go to zero!
Will the bank run bring down the Communist Parties banking and financial system? Of course, there are countless examples in history, from the time of the Republic to the Communists. Under the rule of the Communists, a few years ago a bank run on Jiangsu started and today it is even worse.
In addition, the Communist party has been rigorously promoting the digital currency (the E-Yuan), perhaps as a way to prevent more bank runs. As mentioned above, the emergence of large scale electronic transfers will lead to “silent bank runs” so there will still be risk of bank runs. To what extent will the bank run in China worsen? The Communist Party are the ones that most clearly know, and people outside the system can only wait and see.
(Dr. Xie Tian is Professor of Marketing at the University of South Carolina Aiken School of Business and John Olin Palm Chair Professor)
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