China: Bank collapse threatens China’s economy and may trigger central bank response

Baoshang Bank branch in Beijng


Up until a few weeks ago the Baoshang Bank’s prospects seemed bright enough.

Key points:

  • China’s central bank has pumped $125b into the financial system following the collapse of the Baoshang Bank
  • The collapse triggered the first ever intrabank default in China, strangling credit to small banks and driving up borrowing costs
  • There are fears the tighter credit conditions will further hit a slowing Chinese economy

According to Baoshing’s most recent regulatory filing, the smallish lender based in Inner-Mongolia, made a $600 million profit in 2017.

It had assets of around $90 billion, non-performing loans were modest — under 2 per cent — and its capital buffers would fit comfortably with the global demands of a Tier1 bank.

Then it collapsed.

That set off a series of events rarely, if ever, seen in Chinese banking.

A ‘Lehman moment’?

Regulators seized Baoshang, the first action of its type since 1998.

That may have shaken the foundations of Chinese banking, but of far greater significance was the collapse caused China’s first recorded interbank default.

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