China’s Coming Banking Crisis- The Banks Are Loosing Deposits At a Rapid Pace

In Special Report- The Secret Engine Behind China’s Housing Bubble- The Ponzi Shark Loan Finance

This is how this ponzi scheme works:

Local governmental officials, that are demanded from the government to produce double digit GDP growth numbers give real estate developers permits to build housing projects in return for bribes. They also get bribes in return for allowing the shark loan companies to operate under their jurastiction. some of them are active partners in shark loan businesses. For example, a party secretary of legal affairs, that controls the public security bureau, which is a court and prosecutor division of government in yongkang city, in zhe jiang province tired to run abroad using a passport in 2009 after he found out he can’t repay 60million Yuan. In li Every scheme has a ring leader who's job is to collect money from all the participants in the ponzi scheme. When some of these ponzi schemes blow up, the party leaders always get bailed out first, and some even ask local business owners to lend them money, and then bail out their own personal fund. After that the ring leader turns himself in and gets protection from the local government.

Due to the crazy amount of leverage in the system and due to the attempts of the Chinese authorites to cool the red hot housing market Chinese banks are increasingly facing the dwindling deposits, and are forced to lure customers with higher interest rates

Today’s China Security Journal articles  was titled:

"Lower Interest Rates Can No Longer Attract Deposits, Major Banks Are Luring Customers With Higher Interest Rates."

By the end of March, Citi bank, Ever bright bank, Merchant Bank, Pudong Development banks, Industrial Bank, and Minshen Bank of china’s loan deposit ratio is exceeding the official upper limit(75%) set by CBOC and China Banking Regulatory Committee. Among them, Mingshen and industriral bank are exceeding 80%, while local city commercial banks are at even worse of a shape.

So, the deposits in Chinese banks are shrinking and they are facing rising liquidity risk while there is a capital out flow of wealthy Chinese .

Another article in today’s 21 century economic report (A well respected newspaper and website in China)

reported that while China’s banks lured customer deposits with higher interest rates, the treasury deposit rate surged to 4.2%. Major banks are chasing the treasury cash, which is perceived as being safe, while facing cash flow issues.

This is a major change compared to previous months- in Jan28 treasury cash auction rate was 2.92% , in May 3.48% , and in June 4.2%

So the Chinese Banks are competing with each other for the 30 billion of Yuan being auctioned every month.

With extremely low transaction volume in this year’s real estate market, all the capital of the country is already tired and sunk in this sector. Since many in China fear of runaway inflation, many households bought real estate life time savings and a lot of leverage, the economy simply doesn’t have enough capital to support all asset classes together. So this year’s A share market has very thin trading volume, while the bank deposits are shrinking, both are clear and classic signs of signs of liquidity problems in China