Is China losing control over its economy after Baoshang Bank failure?

Takeover of Baotou-based lender in May was the first bank failure in over 20 years in a system that had come to believe that all financial institutions were guaranteed

Government-directed investment in the Bank of Jinzhou last week further underscored the problems as big banks reduce loans to smaller institutions

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Financial regulators unexpectedly took over Baoshang Bank in May, with the China Construction Bank taking over daily operations. Photo: Orange Wang

Published: 6:10am, 31 Jul 2019Updated: 4:09pm, 17 Dec 2019

The scene is just as you would expect in any bank on any normal workday, customers going about their business while staff and security guards share the occasional joke as warm July afternoon sunlight fills the lobby.

Just over two months earlier, the scene inside the bank in the Inner Mongolian city of Baotou was completely different. On May 24, financial regulators unexpectedly took over Baoshang Bank, the first bank failure in China in more than 20 years. It set off a chain reaction that created significant stress in China’s money market, weakening small banks and eroding the government’s ability to control the economy.

Government-directed investment in the Bank of Jinzhou last week further underscored the problems facing the Chinese banking sector.

On one side of bank lobby in Baotou there is also still a stark reminder of Baoshang’s demise, with three posters hanging on a whiteboard giving the full statement from the People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC) describing the takeover, citing “serious credit risks”.

The People’s Bank of China and the China Banking and Insurance Regulatory Commission described the takeover of Baoshang Bank as due to “serious credit risks”. Photo: Orange Wang

“We have almost forgotten the incident,” said a customer inside the Anshan Road branch, who gave his surname as Xie. “Right after the takeover, I saw many elderly people holding their passbooks and swarming into the branch. Now everything seems to have calmed down.”

Under the posters, “Baoshang Bank is trustworthy” has been written in green ink, supplemented with a smiley face in an attempt to reassure customers.