The initial signs of the shape of the things to come emerged during the peak of the COVID-19 pandemic. There were long queues formed outside certain Chinese banks. Elderly individuals, who are the most frequent users of cash services at banks, started to complain about the difficulty of obtaining cash. These unsettling signs related to the financial sector often get drowned out by various societal noises or are simply overlooked, interpreted by those without foresight as a "unique phenomenon" and being brushed aside. This continues until the issue worsens over time, evolving into a more widespread systemic problem.
Even a cursory glance at China's financial landscape reveals that the most significant news of 2022-2023 is not the persistently disappointing stock market or even the property market. Instead, it is the fluctuations and changes in policies concerning deposits and withdrawals by the People's Bank of China (PBoC). People are now compelled to shift their attention from "earning money" to "preserving money".
There were, indeed, omens of policy adjustments concerning deposits and withdrawals. After the introduction of Phase IV of the Golden Tax System in 2022, which shifted from taxing corporations to taxing individuals, individual accounts came to be rigorously scrutinized. Thus, individuals needing to deposit or withdraw more than RMB 50,000 had to register the source and provide an explanation. However, due to the immense impact of this regulation, there were later messages of a "temporary suspension" of its implementation, yet the specifics of how this suspension would be imposed remain unclear.
In 2023, news about deposit and withdrawal policy changes has become viral. Many have discovered that online transfers from various banks are actually "subject to limits". Some have reported that their bank's transfer limit is relatively high, up to RMB 500,000. However, numerous netizens have also shared that when conducting transfers through mobile banking or online banking, the limit is capped at RMB 5,000.
There are various versions of the so-called "new regulations from the central bank" circulating online. Summing up the content of these alleged new rules, in certain regions, any one-time transaction exceeding RMB 100,000 in transfers must be reported voluntarily. The pilot regions for this system include Hebei, Zhejiang, and Shenzhen, among others. This measure aims to manage large cash transactions and is said to prevent illegal transactions and money laundering activities. Of course, it is also meant to prevent tax evasion. From the scope of management, the current new regulations seem to be directed at the management of cash deposits and withdrawals, but it cannot be guaranteed whether it will expand to other financial domains in the future. Recently, at the end of August, there was information from banks stating that, according to the latest notice issued by the PBoC, there will also be restrictions on transfers. For individual accounts, the single transaction limit is set at RMB 5 million, and for corporate accounts, it's set at RMB 10 million. The reason for these limits is, of course, to ensure fund security and prevent financial risks, among others.
The latest news online is that in August 2023, the PBoC issued new regulations regarding deposits and withdrawals. These regulations involve real-name authentication, limitations on monthly deposit amounts per individual and per company, as well as the requirement for deposits to be authenticated with real names. The monthly limit for individual deposits is RMB 100,000, and for company deposits, it's RMB 500,000. The monthly limit for individual withdrawals is RMB 50,000 and RMB 300,000 for company withdrawals. It is said that the central bank's actions are based on considerations of financial market stability and security.
Are these pieces of information circulated in cyberspace true? What can be confirmed is that there is no clear denial from official channels. Some of the denial statements come from the "China Internet Joint Rumor Refutation Platform", which its very own authenticity cannot be proven. The platform's messages indirectly indicate that the central bank has referred to it as a "rumor" and claims that the PBoC has "never issued such regulations", though the details remain unclear. The current PBoC is no longer like in the past when documents were posted with clear wordings accompanied by a large red stamp, displayed prominently at the entrances of all bank branches. Even official information is now only circulated on the internet, where they might not even be noticeable.
Since becoming infatuated with concepts like "dual-driven" China's cyberspace has long transformed into a sort of flourishing economy for arranging jobs for young people and post-retirement reemployment for the elderly. As thing stands, it has also become a breeding ground of false entrepreneurial information, making it difficult to distinguish truth from falsehood – an all too normal scenario. Our analysis here is based on a hypothetical scenario: If such a situation were to arise, what would this financial crisis imply? Moreover, our research is actively seeking to explore whether there might be better ways for the banking industry to handle crises.
If a simple evaluation is done on what is referred to as Chinese assets, it could deviate from the viewpoints of economists and authoritative central bank experts. After China's globally recognized status as the "world's factory" was intentionally relinquished due to diverse regional planning policies, what remains can be grouped into three predominant sectors: real estate, manufacturing, and services. China's official macro-control policies aimed at the real estate industry are conspicuous in that they prioritize housing for habitation rather than speculation. This constitutes a comprehensive policy framework with numerous policy checkpoints tightly sealed. As a result, the former grandeur of China's real estate industry has drawn to a close.
In the case of real estate, the situation is challenging, and the manufacturing sector's condition is even worse. Some years ago when Chinese industrial parks attempted to undergo transformations, ANBOUND warned that the result might not be what was originally intended. As it stands, the actual outcome is that many of the industrial parks throughout various regions have ultimately transformed into real estate. Currently, the last remaining foreign manufacturing enterprises, primarily persisting due to supply chain considerations, find themselves in a precarious situation. With the end of globalization and the substantial adjustments of global corporate supply chains, these foreign manufacturing enterprises that were holding on are also beginning to withdraw from China, due to high costs and uncertainties.
There is of course the service sector, including consumption that was previously neglected but is now emphasized. However, the issue lies in the fact that, just like the definition of the nature of industries, the service sector relies on production activities. If production activities are not profitable, consumption activities will undoubtedly become unsustainable. If consumers have to rely on their savings for expenditure, such a mode of consumption will not be sustainable. Therefore, China's three major sectors face significant issues.
From industrial to financial, the transmission of crises will not take much time. The data of Evergrande Group appears to carry the bone-chilling omen of an incoming financial crisis.
Recently released data shows that Evergrande Group, China's leading real estate company, had a total debt of RMB 2.3 trillion as of June 30. After considering the contracted liabilities of RMB 600 billion, the total debt is RMB 1.7 trillion. This means that this giant in the real estate industry currently holds an unsettled debt of RMB 2.3 trillion. Furthermore, the company operated at a loss of over RMB 30 billion in the first six months of 2023. With such figures for the leader of China's real estate market, there's practically no positive outlook. The situation is even more troubling because other real estate groups in China, like Jinke, Risesun, Macrolink, and Country Garden, are facing similar challenges. The data from this peak debt period will certainly reach an astonishing height. It is sometimes said that around half of China's GDP is attributed to real estate, and this is a reasonably accurate estimation, and such is the current state of China's financial crisis.
In the face of such a financial crisis, during the peak of the crisis, how should it be resolved?
There are three perspectives in addressing this situation: before, during, and after, with three corresponding categories of voices and actions. The aftermath is the domain of news media and individuals occupying positions in academia, holding social responsibilities, or bearing public recognition. It is a stage where unfolding issues often find a number of commentators, attracting substantial attention. During the crisis itself, it predominantly belongs to officials who function as both operators and pivotal figures in managing the events. However, the most intricate challenge lies in proactive forecasting and the formulation of solutions before the eruption of the crisis. In these moments, even the most seasoned experts tend to remain silent, as if there is a collective state of anticipation awaiting the arrival of a major occurrence.
The theoretical framework surrounding financial crises is indeed a subject of controversy. In this analysis, we will temporarily set aside theoretical considerations and instead focus on the practical aspects of addressing and resolving financial crises.
The PBoC's recurrent introduction of new regulations, which primarily involve restricting deposit and withdrawal activities, while perhaps being the most immediately accessible policy option, exhibits pronounced shortcomings. Limiting such activities essentially equates to constraining capital mobility. Although the policy's declared intent is to mitigate the risk of systemic financial instability, utilizing this approach to curtail risk carries inherent perils. This is due to the fact that policies restricting deposits and withdrawals are bound to reduce liquidity and subsequently impact consumption. This gives rise to a significant economic contraction, contravening the interest rate policies associated with rate reductions. Hence, the central bank's pursuit of stability for certain mid-sized and peripheral banks, as well as safeguarding the prior aggressive investments of some banks in the real estate sector, may not be a prudent course of action. In practice, the PBoC's approach serves to exacerbate the macroeconomic dimensions of the financial crisis, potentially precipitating instability across the entire financial system.
As for another interpretation frequently encountered, which posits that the new regulations from the central bank are targeting current telco scams, it must be acknowledged that employing policies that disrupt financial order to combat criminal activities does not align with sound practices. Clearly, such an interpretation lacks logical coherence. The so-called new regulations are in fact a response to the inherent problems within the financial system itself. In other words, China is confronting a challenging threat of a financial crisis.
The optimal course of action involves preemptive crisis management actions. The PBoC can opt to implement proactive crisis management measures, with a key focus on immediate consolidation and restructuring of banks and the financial sector, grounded in thorough credit and asset assessments. In response to China's ongoing and future industrial adjustments, it is imperative to restructure smaller banks holding substantial risk assets, as well as high-risk segments within larger banks, into larger banking conglomerates. This strategic consolidation leverages scale to absorb risks and enhance credibility, proactively mitigating financial risks. This also allows the removal of high-risk small banks and financial segments, along with associated financial risks. In essence, this entails harnessing large banks and financial conglomerates to instill financial confidence, thereby gaining time to address and alleviate both present and potential financial risks.
It should be noted that the process of a country's path toward modernization is, in practice, a process of accumulation and monopoly. Encouraging the growth of larger entities and resisting anti-monopoly measures are fundamentally administrative responses. Consolidation to promote the emergence of large banks and financial conglomerates can facilitate a relatively lower proportion of risk assets. Such a strategy is to manage risk through size, and this represents the primary approach and perspective for addressing the current financial crisis in China.
Existing large banks also hold substantial assets related to real estate, which may not be entirely risk-free. However, there are two critical factors to consider. Firstly, these risk assets can be effectively managed and segmented. Secondly, large banks and financial conglomerates enjoy favorable conditions in the market to issue commercial bonds, with significantly higher credit strength compared to smaller banks. This credit disparity works to their advantage in debt management. Reversing the macroscopic trend of China's debt levels and minimizing overall debt risk constitute the central focus of the current solutions proposed to address the financial crisis in the country.
A crisis should not be seen as an insurmountable obstacle. The key lies in transitioning from theory to practice, taking targeted actions to facilitate the swift recovery of market entities of various natures. The objective is to prevent them from escalating into a widespread issue. Relying solely on established practices and conventional operations can lead to more significant problems and losses. A rapid and decisive industry reformation is then a necessary course of action, as this can effectively mitigate significant systemic risks within the financial sector.
