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Fears of Evergrande Bankruptcy Trigger Bank Run in China



This week, a local bank affiliated with heavily indebted Chinese property developer Evergrande made headlines as it faced a significant rush of depositors looking to withdraw their money. The bank, located at the head office of the Bank of Cangzhou in Hebei province, has witnessed long queues since October 7, raising concerns of a potential bank run crisis in China. Videos and photos of the depositors lining up have been widely shared on social media.


A minor surge in withdrawals occurred following the circulation of a social media post that suggested numerous Chinese banks might be compelled to write off their loans if Evergrande faced bankruptcy. The post specifically claimed that Evergrande owed approximately 3.4 billion yuan (US$466 million) to Cangzhou Bank. However, it's important to note that Asia Times could not independently verify this amount at the time of publication.


In response, the Bank of Cangzhou clarified that its outstanding loans to Evergrande and its associated entities amounted to a much smaller sum, standing at 340 million yuan as of October 6. This figure represented only a fraction of the amount asserted in the widely shared social media post. The bank also emphasized its ample collateral in the form of lands and properties, which would serve as a safeguard against any potential losses associated with Evergrande.


The bank stated, "The overall risk is manageable and will not significantly impact the bank's day-to-day operations, management, or asset quality."


Despite the bank's assurances, Chinese media reports have indicated that the statement and the visual display of a "cash wall" have not yet alleviated the concerns of its depositors. In China, "cash walls" are more commonly associated with corporate events, such as the distribution of annual bonuses.


Initial optimism about Evergrande's potential avoidance of bankruptcy is waning, with Hong Kong's High Court scheduled to convene a hearing on a liquidation case filed by Evergrande's offshore creditors on October 30.


To allay concerns that the ongoing property crisis might pose a threat to China's financial stability, the State Council, in a guideline issued on October 11, expressed its commitment to assisting urban commercial banks and rural financial institutions in addressing problematic assets and loans. Simultaneously, it will bolster their capital through various means.


In a joint statement, the People's Bank of China (PBoC), the former China Banking and Insurance Regulatory Commission, and the local government's financial management office in Suning, Cangzhou, urged consumers to exercise prudent judgment and not be swayed by unfounded rumors, preserving their interest income.


The statement highlighted that the Bank of Cangzhou, as of the end of September, possessed total assets amounting to 245.6 billion yuan. Furthermore, it disclosed a net profit of 1.21 billion yuan for the previous year and recently fulfilled its tax obligations with a payment of 600 million yuan. This affirmed the bank's robust and stable financial standing.


The statement also emphasized that the bank's depositors enjoy protection under China's deposit insurance scheme. This scheme ensures that in the event of a bank's bankruptcy, depositors can receive compensation of up to 500,000 yuan.


An article by a writer based in Hunan explained that all banks in China contribute to deposit insurance. This safeguard is underpinned by the nation's legal framework, assuring depositors with the highest level of credit credibility at this stage.


The writer suggested that individuals who remain uncertain about smaller banks should consider depositing their funds in larger state-owned banks.


On another note, a columnist from Henan, who goes by the pen name Ku Ge, proposed that the Bank of Cangzhou might face a collapse due to unwarranted rumors rather than Evergrande's outstanding debts. He argued that the latter issue is relatively minor. He also highlighted the vulnerability of even a massive institution like the Industrial and Commercial Bank of China, stating that it would not withstand a sudden mass withdrawal by depositors.


Complex Legal Situation

Evergrande announced on September 28, via a filing with the Hong Kong stock exchange, that its chairman, Hui Ka-yuan, is currently "subject to compulsory legal actions stemming from suspected unlawful activities."


In earlier reports, Bloomberg had stated that Hui was being closely monitored by law enforcement. Observers in China suggested that potential penalties faced by Hui might be linked to the failure of Evergrande's wealth management division to meet its investor obligations.


Nevertheless, this situation appears to be considerably intricate.


The report disclosed that over the past several years, Evergrande had distributed approximately 90 billion yuan in dividends to its shareholders. Interestingly, the majority of these funds were funneled through offshore entities registered in the British Virgin Islands and the Cayman Islands, which were ultimately controlled by Ding after her divorce from Hui.


A corporate governance expert cited in the report stated, "Hui had declared in a high-profile speech in 2021 that he could risk losing everything but would not allow his employees to 'lie flat' in property delivery to homebuyers. But his actions contradicted his words."


The couple's divorce reportedly took place last year. Ding's status as Hui's spouse was no longer evident in Evergrande's August filing, and she had left Hong Kong in late July, holding a Canadian passport.


In response to the impending debt crisis at Evergrande in 2021, Beijing mandated that the company prioritize property delivery as its paramount corporate responsibility. Hui was also compelled to part with his luxury yacht, villa, and aircraft to settle Evergrande's debts.


However, by the end of last year, the company still found itself burdened with net current liabilities amounting to 687.7 billion yuan and a total debt load of 2.44 trillion yuan. Furthermore, Evergrande faced additional challenges due to declining home prices this year.


Chinese media reports indicate that Evergrande continues to grapple with 1.62 million incomplete apartments, impacting the lives of over 5 million individuals.


Reference:

Pao, J. (2023) Evergrande bankruptcy fears spark a bank run in China, Asia Times. Available at: https://asiatimes.com/2023/10/evergrande-bankruptcy-fears-spark-a-bank-run-in-china/ (Accessed: 16 October 2023).







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