Shanghai’s Composite Index has dropped by 10% this week, much of it in the past two days, falling from about 3500 to now 3200.
That’s after a mini bull run as the beginning of the month, probably due to hopes of economic recovery with it now again just about growing in China. But after some brief sideways, stocks seem to have turned:
The reason for this fall is probably because of concerns regarding the health of the banking system in China which appears to be under some pressure.
The government there ordered banks last month to sacrifice $212 billion (70% of their profits) to help boost the economy according to a local paper.
Then more recently Trump signed a bipartisan bill to sanction high ranking Chinese officials over their treatment of muslim and ethnic turkish minorities.
That law has punitive measures against banks that do business with sanctioned officials, including bans on receiving loans from American banks, participating in foreign-currency and banking transactions, and investing in equity or debt. The government may also freeze the assets of designated institutions or restrict exports to them.
They could also be cut off from the dollar system completely, restricting their ability to engage in international trade unless they want to go bitcoin.
Then there’s the events in Inner Mongolia where the once star performer Baoshang Bank was taken over by the government last year as it could not sustain operations, leading to some jitters among depositors.
Finally, a new policy has also come in recently limiting withdrawals to 100,000 yuan, about $14,000.
With this background, some rumors apparently began circulating that banks were running out of cash with a bank run kept low key but “a reporter from the 21st Century Business Herald learned that on July 11-12, many depositors withdrew cash in advance at the outlet of Jingxian Branch of Hengshui Bank,” says Sina Finance.
Two individuals were arrested for allegedly spreading fake rumors like the bank closed their account, Chinese media reports.
“On July 13, the official public account of the Political and Legal Committee of the Jizhou District Committee of Hengshui City issued a notice saying that two netizens in Jingxian County distributed and disseminated ‘untrue information” such as ‘a bank account in Hengshui was blocked.’ The day before, the local public security detained Yang Mouyun and Liu Moufang for five days on the grounds of ‘suspicion of falsified facts disrupting public order,'” they say.
On July 13th, in a statement titled “Announcement on the Rumors that a Bank Account in Hengshui was Sealed and Insufficient in Cash,” they say:
“Hengshui Bank has sufficient funds to fully guarantee depositors’ demand for withdrawals and protect depositors’ deposits security.”
The statement was made by the Jizhou District Financial Work Office, the People’s Bank of China Jizhou Sub-branch, and the Hengshui Banking Insurance Regulatory Branch Jizhou Supervision Group.
There was also a bank run on Baoding bank in the city of Baoding, with officials stating that the bank was operating normally and people “should not believe in or spread rumours… and should jointly be safeguarding good financial and social order.”
Whether these are localized and limited events or just the beginning of more to come as economies contract by as much as 20%, remains to be seen, but bitcoin is outside the banking system so it shouldn’t be affected except that there might be more demand for the crypto as gold nears all time high.