While most market attention is focused on the recovery from the COVID-19 outbreak, there are new and important signs of stress in China’s financial system, particularly within non-bank financial institutions such as trust companies. Domestic media outlets have also recently reported on bank runs at two smaller city commercial banks.
Most significantly, the widespread public presumption that investment products cannot default is breaking down, and defaults and losses are occurring in many different asset classes. As the credibility of government implicit and explicit guarantees erodes, smaller banks and non-bank financial institutions will face additional defaults and bankruptcies. The conditions for China’s slow-motion banking crisis to accelerate are in place.
