The Chinese Bank Run
Why are Chinese Citizens Rushing to Withdraw Money from Banks?
November 8, 2016, 8PM.
The day when 99% of our currency became non-tenable overnight. Illegal. It is hard to forget the panic we felt that day.
Back then, the stated purpose was to tackle black money. Whether it was successful or not is debatable. We’ll not get into that.
So why scratch this old wound again? And what has it got to do with China?
Well, a similar announcement was made in July by the government of our favourite neighbour: China.
The Communist Party of China put strict curbs on cash withdrawal from banks. Individuals withdrawing more than 1,000 Yuan (~Rs. 10,000) and businesses withdrawing more than 500,000 Yuan would require prior government approval.
But, why?
In the last few weeks, the banks in China have been unable to pay back customers as a large number of people gathered in crowds to withdraw their deposits. So much so that the police had to be involved and plead with customers to not withdraw their own cash from banks on “unsubstantiated rumours”. They even started arresting people who talk about the collapse of the Chinese economy and the failure of banks to pay back the deposits.
Crazy, right?
But, why is the Chinese government so afraid of people withdrawing money from their bank accounts?
What’s their problem? It’s the individual’s own money at the end of the day, right?
Not so simple. Let’s take a step back and look at the bigger picture.
The government is placing such withdrawal limits due to fears of a bank run.
Understanding Bank Runs
Bank runs happen when a large number of people start making withdrawals from banks because they fear the banks will run out of money.
People panic and run to their banks to withdraw money. Banks don't have enough cash available with them, fail to repay the depositors, and go bankrupt.
How the hell is this even possible? How can banks not have money with them? They are just holding the money in the “bank accounts” on our (depositors) behalf, right?
Wrong.
Banks don't keep everything we deposit with themselves as cash on hand. The money they take from depositors is used to loan out to others or is invested somewhere.
To meet the depositor's withdrawal requests, the bank sells off its assets as fast as it can to raise money — sometimes at significantly lower prices than if it did not have to sell quickly. Losses on the sale of assets at lower prices further hurts the bank, to the point where it cannot repay everyone their full amounts. They go bankrupt.
What begins as a rumour of bankruptcy, can actually turn true and make a bank go bankrupt. It’s all connected. The beginning is the end and the end is the beginning.
But, what if the rumour is that ALL the banks are going to fall apart?
That’s what is happening in China.
The people of China have started to realize that a collapse of the Chinese economy is right around the corner.
The number of bankrupt companies in China has grown exponentially in the last few years. The distrust in the Chinese financial system grew after the coronavirus pandemic which led to the closing down of many businesses.
“What? Coronavirus? China seems to have recovered from it back in March itself. Naah, I don’t think it’s the coronavirus that is causing the collapse of the Chinese economy.”
Think again. The pandemic has fuelled aggression across various governments around the world. How can they stay quiet after seeing all that has happened because of China’s bad eating habits?
A great part of China's revenue comes from its exports. Maybe that’s why the USA, India and various other countries started boycotting Chinese goods.
Hit them right where it hurts.
India banned TikTok and several other Chinese apps. Trump increased import duty on all products that are made in China so that purchasing Chinese products becomes costlier, and no one would be willing to shell out hefty sums for these products.
The ripple effects of this?
Many companies (including Apple) that have most of their operations in China are now planning to move their manufacturing base to India and other South-east Asian countries (here’s our detailed coverage on this).
The Chinese companies have lost business worth trillions of dollars due to coronavirus pandemic induced lockdown and momentum against the Chinese state in the last few months.
Ultimately, these companies will not earn enough money and hence will not be able to repay the debts taken from banks.
If that happens, banks will lose a lot of money. And who keeps money in banks? The public.
This is what has spooked everyone to withdraw all their cash and keep it safe with them.
Hold on. There’s a much much bigger problem going on in China.
Chinese debt is a bubble that is about to burst. Wondering how China has grown up to be such a huge economy? How has it achieved this scale of growth in just 10 years?
Well, China has recklessly borrowed in the past and is now under a debt burden. Time is running out for China to get out of its debt trap.
They say, "Even your shadows leave you alone when it's dark."
The darker side of the Chinese economy is yet to be exposed. Stay tuned for the next write-up, where we will expose the "shadow-ed" side of China.
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