Bank Runs, Soaring Food Prices Heighten China’s Economic Woes

Yi Gang, the governor of Chinese central bank People's Bank of China, attends a press conference on the financial reform and development during the second session of the 13th National People's Congress (NPC) at media centre in Beijing on March 10, 2019. Lintao Zhang/Getty Images

News Analysis

Over the past year in China, pork prices have skyrocketed, the economy has continued to slow, and two small banks recently experienced bank runs.

These events come as the country is locked in a bruising trade war with the United States, which has seen billions of dollars worth of Chinese imports subjected to U.S. tariffs, blunting China’s manufacturing sector.

With problems mounting on several fronts, commentators have expressed alarm that Chinese authorities don’t have the tools to save the economy.

Bank Runs

In the past few weeks, two small Chinese banks have experienced bank runs.

A bank run is a phenomenon where individuals withdraw their money from the bank en masse at the same time, generally in fear that the bank will declare bankruptcy. Bank runs can prove disastrous for banks and could create a self-fulfilling prophecy, wherein the bank run triggers the bankruptcy.

Yingkou Coastal Bank is a private bank founded in Yingkou city of northeastern China’s Liaoning Province in 2010 and focuses on supplying services to small and mid-size businesses, as well as individuals.

On Nov. 6, hundreds of locals crowded inside and in front of branches of Yingkou Coastal Bank attempting to withdraw all their savings from the bank. According to local media, people said that they heard from friends or relatives that the bank was on the edge of bankruptcy, and their savings could disappear if they didn’t withdraw their funds before the bank declared bankruptcy.

To ease the panic, Yingkou city government published a note on the same day to calm the masses. The note said, “Yingkou Coastal Bank has sufficient funds and all businesses are operating normally.”

In the evening, the city organized a press conference, in which its police bureau announced that it had detained nine individuals suspected of spreading fake news that the bank was in dire straits.

Shortly before the bank run, news surfaced at one of the bank’s major shareholders could be in financial trouble. A Beijing news report on Nov. 5 showed that Huajun Holdings, a holding company that owns a sizeable share of Yingkou Coastal Bank, was investigated by Hangzhou intermediate court of Zhejiang province over allegations that it didn’t have enough assets that could be sold to pay its outstanding debts.

The report was deleted after Yingkou Coastal Bank suffered its bank run, but Google saved the webpage cache.

Yingkou Coastal’s bank run was only one of two in a matter of weeks. On Oct. 29, Yichuan Rural Commercial Bank located in Yichuan county, Luoyang city of central China’s Henan Province experienced a bank run.

The bank run occurred after the county government detained Kang Fengli, the chairman of the bank, for “seriously violating discipline and the law” on the evening of Oct. 28.

According to local media, Kang had been accused by locals of bribery and corruption since 2018.

Even before the bank run, Yichuan Rural Commercial Bank’s prospects were downgraded. On July 31, China Chengxin Credit Rating Group, Chinese first nationwide credit rating company downgraded Yichuan Rural Commercial Bank’s credit from AA- to A+, and pointed out that the amount of debt it had increased at an unsustainable rate.

The bank run came to an end after the county government, police bureau, and China’s central bank got involved in the case. County authorities also replaced Kang with the vice county Communist secretary on Oct. 30.

Economists’ Concerns

Economists predict that more Chinese small and midsize banks will face similar issues next year as recent performance figures slow.

In an attempt to bring financial stability, China’s central bank, the People’s Bank of China (PBoC), announced that it would invest 10 billion yuan ($1.45 billion) in the troubled banks and that it also established a deposit insurance fund on May 24.

Despite these efforts, experts remain skeptical if these measures will be sufficient as the economy slows. Yang Bin, economist and vice president of Tsinghua University, one of China’s top universities, told Chinese-language NTD, The Epoch Times’ sister media, on Nov. 8: “It [the Chinese regime] always says that the economy has no issues, but please remember when it claimed unit production reached five thousand kilograms, many people died of hunger,” referring to the regime’s policies during the “Great Leap Forward,” a disastrous industrial campaign launched in the 1950s which resulted in the “Great Famine” in which tens of millions are estimated to have died.

Yang said the bank runs are just a symptom of poorly operated banks.

“Currently, China’s economy isn’t in good shape. Banks lack money. Profits of each local government aren’t positive… It’s normal that the economy would meet with some issues,” he said.

Inflation

While financial fragilities expose the holes in the financial sector, China’s recent inflation numbers reveal a more systematic struggle facing the Chinese economy.

Chinese National Bureau of Statistics released the October China Consumer Price Index (CPI) on Nov. 9, revealing that prices rose 3.8 percent since October last year. CPI has been rising sharply in China on the back of rapidly increasing food prices.

In detail, food prices have increased 15.5 percent from last October and were led by pork prices, which have more than doubled. Other meat prices have also experienced large increases: Beef prices rose 20.4 percent, lamb increased 16.1 percent, poultry by 17.3 percent, and eggs by 12.3 percent.

These price pressures have been off the back of African swine fever decimating domestic pork stock. This has had knock-on effects on other food prices. This is a cost borne directly by the Chinese people.

“In general, we have been eating more vegetables than others since this summer,” He Xin, a Beijing resident told The Epoch Times by phone on Nov. 27.

Ms. He is a working mom and lives in Xicheng District with her husband and teenage son.

“I went to the market today and the pork belly is 41.5 yuan per 500 grams ($5.36 per pound). Beef flank is 54 yuan per 500 grams ($6.98 per pound)... Who has money to eat meat everyday!” she said.

The Beijing-resident is originally from central China’s Hunan Province. She said that families in her hometown would make pork sausage and bacon before the new year, but this year has been tough for people.

“Pork prices are too high ... and the worst thing is lots of our friends lost their jobs in Guangdong Province and came back home,” He said.

As food prices rise, the CPI numbers mask another story in the Chinese economy—that of slow and sluggish growth. Core consumer price growth remains subdued, while producer prices have declined over the past year. This all points to a weakening economy struggling to generate demand. Mix that in with high food prices and it’s becoming a difficult problem for the regime’s policy arms to handle.

Flagging Economy

The PBoC’s own Financial Stability Report highlights the challenges facing the Chinese economy. The report published on Nov. 26 states that the economy is being “affected by domestic and international factors, some long-term accumulated deep-seated contradictions in the Chinese economy are gradually exposed, financial failures are prone to occur, and economic growth is facing more difficulties.”

The report also shows the amount of risk that has built up in China’s financial sector. The report lists 586 financial entities as high risk, most of which are small- and mid-sized banks based in rural areas. This equates to 13 percent of all financial organizations in China.

These financial fragilities are at risk of becoming exposed as the economy shows further signs of weakness.

Profits at China’s industrial firms shrank at their fastest pace in eight months in October. Industrial profits fell 9.9 percent in October year-on-year to 427.56 billion yuan ($60.74 billion), data released by the National Bureau of Statistics showed on Nov. 27, marking the biggest drop since January-February period and compared with a 5.3 percent decline in September.

Meanwhile, total profits from state-run industries was 1,471.55 billion yuan ($209 billion) — a 12.1 percent decline relative to the same period in 2018.

The country also reported its slowest economic growth in 27 years in October as the trade tensions with the United States hit its manufacturing sector.

These figures might even understate the decline. Chinese government official data is known to present a rosy picture and is often suspect.

Even Chinese Premier Li Keqiang may not rely on this data; He created a new measure to gauge economic activity—the “Li Keqiang Index”. This index combines three indicators: the railway cargo volume, electricity consumption, and loans disbursed by banks.

However, PBoC and the Chinese National Bureau of Statistics do not publish these three indicators.