China in Banking Crisis - 40 banks vanish
Tomorow's News Today - Show notes for the July 23rd Podcast
Micheal and I kick off today’s show by talking about China and its financial problems. This is very concerning for several reasons. In the past, when countries lost financial control, they went to war to cover up the issues. With China, it is also magnified by the problem that they buy so much oil from Iran and Russia at discounted rates and not on the PetroDollar. Both impact the US financial system.
1: China’s banking turmoil: 40 banks vanish as crisis deepens
The Chinese banking sector is facing a severe crisis. In just one week, 40 banks disappeared, and the collapse of Jiangxi Bank has further deepened the sector’s problems. Experts warn that the situation could have severe consequences for the global economy.
Reports from China indicate the collapse of one of the banks. The portal renminbao.com published a report from outside the headquarters of Jiangxi Bank, which concerned clients stormed over bankruptcy rumors. The bank had previously informed that its profits could drop by 30% due to customers’ loan repayment issues.
China’s growing problems with banks
The Economist described the situation in the Chinese banking market. It was noted that approximately 3,800 banking institutions were threatened in China. Their assets are 55 trillion yuan ($7.5 trillion), representing 13% of the country’s banking system. The magazine emphasizes that these banks have long been poorly managed and have accumulated vast amounts of bad loans.
The report states that many of them lent money to developers and local governments, exposing themselves to the impacts of the real estate market crisis. The authors note that in recent years, some banks have revealed that 40% of their portfolios are non-performing loans.
Disappearing banks and attempts to rescue the sector
The rare disclosure of a bank’s problems may underscore the seriousness of the situation. A similar mechanism was observed with developer companies. Little was heard about the giants’ problems until the authorities eventually confirmed an issue affecting the entire industry.
“The Economist” points out that China’s primary strategy in dealing with small, weak banks is to “absorb” them. Of the 40 recently disappeared institutions, 36 were located in Liaoning province and were taken over by a lender named Liaoning Rural Commercial Bank.
Cryptocurrency market analyst Sigma G also examined the situation in China’s banking sector. He points out that the leading cause of the problems is the deep recession in China’s real estate sector. Over-indebted developers and local governments fail to repay loans, leading to financial instability. Property prices have plummeted, and construction projects have been halted, further burdening the economic system.
The author also highlights the issue of hidden bad debts. Banks have used asset management companies (AMCs) to offload toxic loans, creating an illusion of stability. However, a new banking regulator, the National Financial Regulatory Administration (NAFR), has begun cracking down on these practices by imposing fines and increasing oversight.
Outlook for the Chinese economy
The author predicts that the Chinese economy is entering a prolonged and feigned growth phase. “Years of credit-fueled growth has finally run its course, and the result will be. lower growth for China and a negative impact on the global economy. Slower growth of the Chinese economy will, in turn, exacerbate their banking problems too,” warns Sina_21st.
The expert forecasts that slower growth in China’s economy will exacerbate banking problems. He believes this situation will most likely end with massive liquidity injections, economic stimulation, and investors fleeing towards hard assets.
S&P experts quoted by “The Economist” estimate that repairing China’s banking system could take up to a decade. However, official data may still not reflect the scale of the problem. The 2023 report of the People’s Bank of China states that 3,655 banks, whose assets accounted for 98.28% of all assets deposited in Chinese banks, are safe. The Chinese bank also confirmed that the risk concerns a portion of small and medium-sized financial institutions operating in rural areas. According to the document, large banks received good ratings, indicating the stability of the economic system.
The clock is ticking, problems may deepen
Why do small banks have such big problems? Many Chinese cities and even entire regions are drowning in debt. The liabilities were so high that local government representatives sent envoys to Beijing in the spring. They are negotiating terms for repaying billions in loans. Unpaid debts are increasingly weighing on regional economies, threatening national economic growth.
The debts that Chinese cities are drowning in are primarily the consequences of the real estate crisis and the effects of the pandemic. Over the past decade, many construction projects were financed with debt. Infrastructure development was supposed to drive local growth, but following the crisis caused by the COVID-19 pandemic, local governments lost the ability to continue investing. Meanwhile, they still have to repay old debts.
Goldman Sachs estimates the debts of the most important Chinese regions at $13 billion. Some of these liabilities are public bonds, and defaulting on them could damage the entire economy.
2: Bad News From China Could Be The Harbinger For Lower Oil Prices
From the mid-1990s to onset of Covid at the end of 2019, China almost singlehandedly drove the commodities supercycle, consisting of ever-increasing prices for the key materials it required to drive its extraordinary economic growth. As the virus took hold across the country, accompanied by its Draconian ‘zero-Covid’ policy that saw entire cities closed at the merest hint of the illness, its economic growth rate plummeted. Last year, it managed to hit its official economic growth target of ‘around 5 percent’, finally posting a 5.3 percent rise over the year, and maintaining its 2023 target for this year as well. However, doubts about the solidity of this rebound have never entirely gone away and they fully resurfaced again last week as the once seemingly unstoppable Asian Tiger announced Q2 economic expansion of 4.7 percent year on year (yoy). This was not only lower than the official target, but it also undershot consensus analysts’ expectations of a 5.1 percent rise over the period. As still the world’s biggest importer of crude oil, all eyes in the oil market remain on China is its likely economic progress from here.
One somewhat positive factor for its oil demand is that the energy-intensive industrial sector has been performing relatively well, increasing by 5.3 percent yoy in June, ahead of market expectations of 5 percent. That said, it was lower than May’s 5.6% growth and is the second straight month showing a decline. “Q2’s figures highlight that divergence in growth drivers persist, with industrial activity continuing to outstrip services,” Eugenia Victorino, head of Asia strategy for SEB in Singapore told OilPrice.com last week. “The Q2 number confirms the momentum of monthly data prints on industrial production and non-manufacturing PMI,” she added. Positive too was the 8.6 percent year-on-year rise in the country’s exports in June, surpassing expectations of an 8 percent rise and improving on the 7.6 percent increase in May. The figure marked a 21-month high of US$307.9 billion and saw the fastest growth since March 2023.
Having said that, the better-than-expected gain has been attributed by many China watchers as being the result of manufacturers front-loading their orders in expectation of increased tariffs being imposed from several of its major trading partners, including the U.S. May 1 saw Washington impose a raft of new sanctions on more than a dozen companies in China and Hong Kong for their support of Russia’s war in Ukraine. As highlighted recently by OilPrice.com, U.S. Secretary of State Antony Blinken made it clear during his recent trip to Beijing that China is “helping fuel the biggest threat” to European security since the Cold War by exporting technology and components essential for Russia’s ongoing war. Privately, according to a senior European Union (E.U.) energy security source spoken to by OilPrice.com, the U.S. has expressed the same concerns about such technology transfers being used by Russia through its Iranian proxies Hamas and Hezbollah in the Middle East, as analysed in full in my new book on the new global oil market order. “China’s insistence that these exports are used solely in a regular commercial capacity cuts no ice with anyone, and this is a sharp red line [for the U.S., U.K., and E.U.,” the E.U. source exclusively told OilPrice.com.
Consequently, the May 1 sanctions are a small part of what will be a laddered approach of escalating sanctions from now on, depending on how China continues to act regarding Russian aggression in Ukraine and the Middle East. “The same applies to the new E.U. tariffs on China’s electric-car makers – a major growing part of its economy – and these can be ramped up at any point,” the E.U. source added. As an adjunct to this, last week also saw Washington state that it is considering extending its trade restrictions on any company that provides China with access to advanced U.S. semiconductor technology. This tough line on China from the still-in-place President Joe Biden aligns with his long-held hardline on China. During his 2020 presidential campaign, he employed very tough rhetoric on China and repeatedly spoke of it acting together with Russia in the context of both the Middle East and Asia. As also detailed in my latest book, although the broad approach of the Biden team to China in his early presidency was close to predecessor Donald Trump’s highly trade-centric policies to ensure Beijing continued to move in the direction of an equitable trade policy with the U.S., there were important differences. The key one was that Biden’s team would not “give up security considerations for trade”, as Trump frequently did, according to Trump’s former National Security Adviser John Bolton.
It may be that China is waiting for a return of Trump at the end of this presidential campaign in anticipation of the resumption of such a relationship, according to the E.U. security source. An early case in point of this bargaining involving trade and security, according to Bolton, was the almost complete reversal of hard-hitting U.S. sanctions imposed on Chinese telecommunications company ZTE for committing major and repeated violations of the U.S.’s sanctions on Iran and on North Korea. According to Bolton, after a private telephone call to China’s President Xi Jinping – in which it later transpired that Xi told Trump that he would “owe [Trump] a favour” if he reduced the sanctions against ZTE – Trump did exactly what Xi had asked for. Trump shortly after tweeted: “President Xi of China and I are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!” As Bolton wrote in his book ‘The Room Where it Happened’: “Since when had we started to worry about jobs in China?”
In the meantime, China’s Third Plenum of the Central Committee four-day meeting ended last week, with Xi reaffirming its commitment to the development philosophy that stresses high-quality economic growth. He also announced a target to double the size of its economy by 2035. However, no major new measures were announced that are geared to stimulating further economic growth from this point, aside from the People’s Bank of China cutting key lending rates. SEB’s Victorino does not expect Beijing to hit the panic button and substantially accelerate policy support anytime soon, given that year-to-date growth is still running in line with Beijing’s “around 5 percent” annual target. That much of this is coming from the energy-intensive industrial sector – rather than from services as in 2022 – may prompt optimism from those who want oil prices higher. However, this ‘Post-Covid Phase’ of growth currently does not necessarily look like one that will power China’s oil demand dramatically higher and drag benchmark prices ever higher with it. The key reason is that China continues to buy substantial amounts of oil at greatly reduced prices from Russia, Iran and Iraq too, through various mechanisms also analysed in full in my latest book.
3: UK Likely to Miss Its 2030 Clean Power Goals
The UK is poised to miss its ambitious target to decarbonize its power sector by 2030 even as it is boosting solar and wind developments, analysts say.
The new UK government of the Labour Party, in office for just over two weeks, has pledged to have the UK power grid decarbonized by 2030 and “to make Britain a clean energy superpower with zero carbon electricity by 2030,” Energy Secretary Ed Miliband said earlier this month.
As part of its efforts to boost clean energy, the UK government lifted the de facto ban on onshore wind, which has been in place in England since 2015.
The government has committed to doubling onshore wind energy by 2030, quadrupling offshore wind, and trebling solar power by the end of the decade.
While Britain has made progress in recent years in decarbonizing the grid and boosting the share of renewables in the power mix to a record high, it still uses a lot of natural gas for electricity generation, home heating, and boilers.
The bold current plans of the Labour government are not on track to make the power system decarbonized by 2030, Cornwall Insight said in an analysis reported by the Financial Times.
Currently, wind and solar account for a combined 34% of the UK’s power output. Under Labour’s plans, the combined share of wind and solar is set to rise to 44%. This, according to Cornwall Insight, will be well below the estimated 67% of wind and solar power necessary to have a decarbonized grid.
“Without significant intervention, we risk falling far short of decarbonisation goals,” Tom Edwards, principal modeler at Cornwall Insight, told FT.
Last week, following the King’s Speech in which the new government sets its priorities, Kate Mulvany, Principal Consultant at Cornwall Insight, said that Labour faces “significant challenges in reaching their 2030 power decarbonization targets, as financial constraints, supply chain challenges, and intense global competition for limited resources pose hurdles.”
Also last week, the UK’s Climate Change Committee (CCC) said that its latest assessments shows that the UK is off track for net zero as only a third of the emissions reductions required to achieve the country’s 2030 target are currently covered by credible plans.
4: Russia Considers Building Oil Refinery in Cuba
This is bad for the US; having a Russian refinery in Cuba would also allow for massive Russian transport and ships to and from Cuba. We would not know what kind of missiles or armaments they would put in the installation.
Russia and Cuba have discussed the idea of building an oil refinery in Cuba with the help of Russian companies, the deputy speaker of the Russian parliament was quoted as saying.
During a visit of Russian lawmakers to Cuba in recent days, the idea of a refinery construction has been discussed, Russia’s TASS news agency quoted deputy speaker Alexander Babakov as saying.
“The biggest Russian state companies could be working here,” the lawmaker said.
“Cuba has crude oil: it is logical not to import oil products but to produce them here,” TASS quoted Babakov as saying.
Russia and Cuba have held close ties since the 1950s when the Latin American country and the Soviet Union expanded ties as fellow communist states.
Cuba’s key crude oil supplier is nearby Venezuela. However, shipments have dropped in recent years, also due to Venezuela’s crumbling oil industry and the U.S. sanctions against Cuba’s staunch ally, Venezuela’s Nicolas Maduro.
The crumbling Venezuelan oil industry means that less fuel oil from the country sitting on the world’s largest oil reserves is reaching Cuban shores to power the old power plants on the island.
Cuba’s power generation is heavily dependent on oil products—according to the International Energy Agency (IEA), Cuba’s energy supply mainly comes from oil products, which account for more than 80 percent of power generation.
Mass protests erupted in Cuba in 2021, due to the crisis in Venezuela and its oil industry.
Early this year, Cuba, which has seen chronic shortages of gasoline and other fuels, said fuel prices would jump by 500% from February 1, 2024. The Cuban government can no longer manage a massive subsidy campaign that puts subsidized prices on nearly all essential goods and services.
Cuba has also imported some Russian crude since 2022. Then there was a year-long hiatus, before some Russian oil arrived in Cuba in March this year.
Thanks to all of our listeners out there. We appreciate all of the great feedback.