Recent Significant Global Economic Events – Week 3

China – Was This the First Shoe to Fall?

On May 24th, 2019, a small bank in Northern China by the name of Baoshang Bank was taken over by the Chinese bank regulators. It is extremely rare for China regulators to take over a bank because China typically just bails out their banks.

In order to understand the significance of this event, one has to focus on the fact that in China, non-bank financiers are the major source of loans to smaller private businesses. Those non-bank financiers are reliant upon the small banks as a source of funding because of the way the Chinese financial market is structured.

As a measure of the negative impact of Baoshang Bank being taken over, the one month Repo Rate (the cost of one bank lending money to another bank for a short period of time) nearly doubled, from 2.9% to 5.2%. The Repo Rate has since declined. Could this be the first crack in China’s fragile financial ecosystem?