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Sold as a "takeover," the regulatory action against Baoshing Bank is much more than that.

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Editorial Staff

In the North West of China, in the district of Inner Mongolia, a small private bank started to get into trouble. The warning signs, with hindsight, were apparent but it's a kind of problem that, while common in Russia a couple of decades ago, is not usual in China. The results, however, are predictable for both financial and cultural reasons.

One of the reasons for that is simple: rumour fuels contagion in Asian markets and China, as demonstrated by the run on Hong Kong banks when there was a threat to a small bank which did not go out of business, is at high risk of such behaviour.

While regulators have said that, once the bank's assets have been liquidated and applied to deposits, they will top up the amount needed to ensure all retail depositors are paid in full while corporate creditors will gegt at least 80% of their deposits and other financial institution creditors at least 70% (caixinglobal.com) . But the story is not clear and there may be some caps on even retail depositors' repayment, it seems.

The action by the regulator, as if often the case performed over the weekend to enable markets and the wider population to digest the news and limit panic, was both swift and decisive. Analysts across the region concluded that, from a markets perspective, the action should not cause significant problems: Baoshang was a small, little known, bank with a small balance sheet. It is widely regarded as an isolated incident. That, however, remains to be seen: its problems were clearly known for a while and, to some degree, regulators were prepared to see if the bank could sort ouf its own problems.

Regulators have made all the right noises, saying they will provide support for small and medium size bank especially in the regions. If that is typical regulator-speak, it means closer supervision and earlier action.

However, some western blogs are either reporting or planting the seeds of panic. At least one is saying that Baoshang is "the first domino to fall." Some are saying that the failure is a sign of trouble caused by the US-China trade war but that seems to be reaching for click-bait phrases: Baoshang's exposure to the US was close to zero and Tomorrow's trade is not dependent on US-China business. However, the PBoC has, it seems, had to cover unexpectedly high withdrawals of cash from banks as the rumour-mill has spread across the country. But it is not as dramatic as one commentator says "Beijing is now racing against time to prevent a widespread panic after it opened the Pandora's box when it seized Baoshang Bank two weeks ago, the first official bank failure in a odd replay of what happened with Bear Stearns back in 2008, when JPMorgan was gifted the historic bank for pennies on the dollar." That's from zerohedge.com and no one we have spoken to thinks that's the case. From an editorial perspective, the view of this author is that it's a way of getting as many names into an article as possible with the intention of getting visitors via search engines.

The fact remains that this is not a takeover: it's an intervention and winding up by a regulator and that's not the same thing at all.

 


 

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