Author: Zarathustra

Chinese banks shares were hit yesterday on the stock market, led by China Construction Bank (CCB), which fell by 2.95% in Hong Kong on the news that it is the biggest lender to Zhejiang Zhongjiang, which is going bust. Interestingly, three months ago I briefly mentioned Zhongjiang when one of its subsidiaries, Jinxing Property, filed for bankruptcy.

This is another case where the risks in the shadow banking system of China is feeding into the formal banking system. Yicai reports that CCB was the biggest creditor of the company among the formal banking peers, which included Bank of China and ICBC. The total debts outstanding for the company amounted to RMB8 billion, with RMB3 billion borrowed from CCB, RMB1 billion from Bank of China and RMB150 million from ICBC. The company, as the name suggests, is based in Zhejiang, one of the places where the informal lending mess is concentrated.

The company started to show sign of troubles last year as it invested heavily in the real estate businesses. As formal banking tightened credit last year following tightened monetary policy, the company started relying on loan sharks and other informal sources of fund with much higher borrowing costs. As the economy slowed, the company found itself cash strapped and unable to service its debts. The role of CCB is interesting because it was the only bank that seems to have ignored the fact that Zhongjiang was in trouble, continuing to lend, including issuing wealth management products to customers to finance Zhongjiang.

Of course, the size of CCB’s loan bank amounts to RMB6.83 trillion, thus the loans to Zhongjiang represent a minuscule amount of total lending outstanding, and the impact of the bankruptcy of this company on the bank is negligible. What is not negligible is the potential size of the problem in the formal and shadow banking systems. As the economy slows much more rapidly and because many companies are highly indebted (borrowing both from the formal and shadow banking systems, while the two systems are intricately linked), we could easily see more problems of this nature coming up.

Source: Macrobusiness.com

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