China’s wave of bank closures continues, with at least 50 small and medium-sized banks dissolving or being merged from the beginning of the year to July, according to official statistics. This number is close to last year’s 77 closures. The situation of defaults and difficulties in withdrawing deposits from account holders indicates that China’s debt problem has not been fully alleviated and there are signs of it spreading to Hong Kong. The difficulty in withdrawing deposits by account holders on the Chinese mainland has not improved, and with Hong Kong gradually becoming more Chinese, Hong Kong account holders may need to make contingency plans in advance.
The lingering debt issue in China has drawn widespread attention from foreign media. Robin Harding, a columnist for the Financial Times, mentioned that the People’s Bank of China has taken a different approach from other central banks around the world by gradually raising long-term government bond rates and openly criticizing some rural banks for purchasing government bonds. The column pointed out that due to the underperformance of China’s stock, real estate, credit, and deposit markets, bonds have become the preferred choice for investors. This indicates that China’s bond market is sending out urgent deflation warnings. In addition, the article also cited Morgan Stanley economists mentioning how in the 1990s, Japanese companies in a low-price environment restricted wage growth, leading to the formation of a deflationary spiral.
According to the China Banking and Insurance Regulatory Commission, the number of financial institutions in China has significantly decreased in recent years, from a peak of 4,607 in 2019 to 4,490 in 2023, a decrease of 117. According to statistics, at least 50 small and medium-sized banks have dissolved this year, including Dongguan Bank’s acquisition of Dongguan Chang’an Village Town Bank on July 25th and Dongguan Rural Commercial Bank’s absorption and merger of Huizhou Zhongkai Dongying Village Town Bank and Dongguan Dalang Dongying Village Town Bank on June 20th. Furthermore, Liaoning Rural Commercial Bank was approved for a one-time absorption and merger of 36 rural small and medium-sized bank institutions on June 20th and took over the effective assets after clearing and verifying the assets of the aforementioned 36 rural small and medium-sized bank institutions.
However, Chinese officials have announced that the non-performing loan ratio for the second quarter of 2024 was 1.56%, a decrease of 0.03 percentage points from 2023, and lower than Hong Kong Monetary Authority’s disclosed specific classification loan ratio of 1.79%. Referring to Japan’s experience of the bursting of the economic bubble, Japan’s non-performing loan ratio was as high as 8.4% in 2001. From 2002 to 2006, the government under then-Prime Minister Junichiro Koizumi enacted financial reforms through mergers and acquisitions of non-performing assets, leading to a decline in Japan’s non-performing loan ratio to 1.8% in 2006.
Despite the decrease in the officially reported non-performing asset ratio in China, tensions remain visible with deposit withdrawals since the run on Hebei Rural Bank in 2022. Reports from the China Securities Journal on July 12th revealed that since July this year, several banks from Zhejiang, Shandong, Shanxi, Hebei, Liaoning, Guizhou, and other regions have announced reductions in transaction limits for some customers through non-counter channels. The Securities Daily reported that China’s banks such as Bank of China (stock code: 3988), Huaxia Bank, and Jiangsu Bank have adjusted transaction limits for non-counter channels payment transactions since the beginning of the year. Internet users have shared feedback indicating measures such as restricting bank card withdrawals to 5,000 yuan and setting a daily cumulative payment limit of 1,000 yuan for non-counter transactions.
Previously, many Hong Kong residents opened bank accounts in Shenzhen to earn higher interest rates. A report from Southern Metropolis Daily in Shenzhen in June highlighted that several banks in Shenzhen implemented withdrawal restrictions, with China Everbright Bank (stock code: 6818) in Shenzhen requiring appointments for withdrawals of 20,000 yuan or more, and Shenzhen Rural Commercial Bank requiring advance reservations for withdrawals of 100,000 yuan or more. Staff members from Beijing Bank, Industrial Bank, China Everbright Bank, and other branch banks in Shenzhen all mentioned that withdrawals over 50,000 yuan required a one-day advance reservation.
A Hong Kong resident, Mr. Chen (pseudonym), who has now moved to the UK, told Epoch Times that he has sold a property in Shenzhen, with millions of RMB funds stored in a branch of Bank of China in Shenzhen. Currently, he relies on Ant Moving Services to withdraw cash back to Hong Kong during visits to his family. He believes that ultimately, most of the funds will only be able to be brought back in the form of belongings purchased from Taobao shipped to the UK.
As Hong Kong becomes increasingly influenced by China, the latest financial results of Hang Seng Bank (stock code: 011) reflect the impact, with its non-performing loan ratio rising to 5.32% due to lending to Chinese commercial real estate. Meanwhile, Hong Kong Monetary Authority has disclosed an increase in specific classification loan ratio for banks in Hong Kong to 1.79%.
Economist Lo Ka Chung pointed out on the online program “Hong Kong to Zhongzhou” that checking a bank’s credit default swap (CDS) is an indicator of measuring the default risk of a bank. If a bank is close to bankruptcy, the CDS data will quickly rise. According to Macrovar data, London-listed HSBC (stock code: 0005) and Standard Chartered Bank (stock code: 2888) had only a -0.09% change in their default swap prices over the past month. While a crisis does not appear imminent, close attention to the situation’s development is necessary.
Many Hong Kong residents also have offshore accounts. In case of a bank closure, how depositors are handled worldwide is an important issue. Hong Kong’s deposit protection system guarantees each account up to 500,000 HKD; China claims to offer protection up to 500,000 RMB; the US provides the highest coverage amount, up to 250,000 USD (approximately 1.95 million HKD); and the UK, a popular destination for Hongkongers, offers deposit protection up to 80,000 GBP (about 800,000 HKD).
In 2022, several village banks in Henan ran into trouble with deposit withdrawals, leading depositors unable to access their funds, eventually resulting in street protests demanding their rights. Many depositors were arrested, put under restrictions, physically assaulted, illegally detained, and subjected to strict monitoring by authorities for an extended period. In March 2023, Silicon Valley Bank in the US collapsed, and the Federal Deposit Insurance Corporation subsequently disclosed all insured and uninsured depositors, allowing the retrieval of all assets after the transfer of assets from Silicon Valley Bank; its UK subsidiary was also sold for 1 pound to HSBC in the UK, ensuring continued service.