(How) Can Bank Runs Occur in China?


As peculiar as it may seem, many analysts believe that one of the “perks” associated with authoritarian governance is represented by the fact that one can “have everything under control” when it comes to the main follies of capitalism: excessive greed, excessive fear, manic-depressive behavior which leads to anything from irrational exuberance on the way up to panic on the way down and quite a few more.

A rather graphic way to sum it up would be assuming that China can have its cake and eat it too or, to put it differently, assuming that China’s “socialism with Chinese characteristics” which embraces many free market elements enables it to be on the receiving end of all capitalism-related benefits without dealing with any of its drawback.

Unfortunately for China, there is no such thing as a free lunch.

No matter how hard you try to control the population of a country through restrictive legislation, propaganda and what not, human nature remains… well, human nature. A Chinese citizen is just as susceptible to greed as his US counterpart and the same principle is valid when it comes to the fear dimension.

Their behavior might not be identical but… let’s just say it rhymes.

An interesting case study is represented by a bank run which occurred in the Shandong province of eastern China due to rumors which involved Linshang Bank (an entity with over 61 billion CNY in deposits at that point in time, in 2017 to be more precise) being less than solvent. These rumors started due to certain employees of a local agriculture processing business being angry about the fact that production lines had been removed and resorted to spreading rumors out of frustration. The rumors in question revolved around loans that the agriculture business in question was allegedly unable to pay back, loans which amount to a sum high enough to potentially bring down the lender (Linshang Bank) altogether.

Unsurprisingly, it worked.

Hundreds of people gathered to demand their money back and it ended up taking a fair bit of convincing by bank representatives as well as the authorities to alleviate their concerns and avoid a full-fledged panic. In the end, the proverbial bomb ended up being diffused and drastic measures were taken against those who spread the rumors: 3 were detained, 11 questioned and 8 of them received warnings.

Does this little case study have any kind of scientific validity? No.

Instead, it acts as a relevant metaphor which makes it clear that despite many things being different in China compared to the West, human nature cannot meaningfully and sustainably be altered.

Had this situation taken place in a Western country, perhaps nobody would have been detained. But leaving such particularities aside, it becomes obvious that elements of human folly tend to be ubiquitous and culture-independent: the emotion-driven actions of those who spread the rumors, the panic felt by those who believed their savings were at risk. Despite there being tremendous legislative deterrents in place (yes, more so in China than in the West), it is important to realize that when it comes to matters which pertain to human nature, even authoritarianism has its limits with respect to what it can inhibit and for how long.

The same way, it is worth pointing out that while there are China-specific elements which one might argue inhibit bank runs (such as the previously mentioned legislative stipulations), there are also aspects one can consider more problematic for China than a Western country. For example the fact that despite tremendous progress having taken place as far as anything from economic growth to education is concerned, the average Chinese consumer of banking services is still less sophisticated than his Western counterpart, with all of the potential problems this can lead to: gullibility/manipulation, over-reacting on all fronts and the list could go on and on.

The Chinese authorities are well aware of this reality and they are equally aware of the specific threats they need to be paying close attention to: the increased and increasing level of debt (whether it is corporate, household or government debt), the less than effective (from a risk management perspective) manner in which local banks provide financing to entities which perhaps shouldn’t qualify, examples are not the least bit difficult to identify.

Finally, another myth worth addressing is the (mis)perception that the Chinese authorities are always on stand-by, ready to bail anyone out which might be in need of assistance. This myth started being debunked once China experienced its first bond default and while deposit insurance schemes similar to the US FDIC and European counterparts have existed in China since May of 2015, more and more market participants are starting to understand that even the “superpowers” of the Chinese authorities have their limits.

On that note, this article’s conclusion can only be this: as an investor, if there is one mistake one cannot afford to make, it is assuming that anyone can genuinely be in control in a market environment. Whether that “anyone” is Xi Jinping or the Chairman of the Federal Reserve over in the US, it is important to understand that no, superpowers to not exist in the treacherous world of finance.

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