Is the Chinese Banking System About to Fail?

The CCP’s economy has been taking hit after hit in the past year. Much of which was self-induced.

The Good News about the Chinese Banking System

Being the second-largest economy in the world and with the largest individual savings rate in the developed nations helps, but is it enough.
China still has the most manufacturing capacity in the world.
China has the largest army in the world, and the Navy has increased capability in the past twenty years.
Using “Debt-Trap” diplomacy, the CCP has gained access to ports around the world.
So far, bank runs have been controlled by the CCP, the police, and the regulating and flagging withdrawals and deposits of over 14 million yen or $14k USD.

The Bad News about the Chinese Banking System

With many western corporations pulling their manufacturing out of China due to increased political and supply chain risk, the Chinese economy is in cash-flow shock.

Some PRC banks are beginning the fail at an increasing rate.
Financial markets have never trusted CCP economic numbers and now do so even less, adding the unknowns and risks.
The Corona Virus has shuttered many plants with an unknown number of casualties with an unknown effect on manufacturing capability. Moreover, the information from the CCP to investors, customers, and creditors is viewed by many as unreliable.
The “fake-gold” scandal from last month has dramatically tightened the capital markets. Loans backed by gold bars at Kingold turned out to be just gold plated tin. This was discovered when creditors demanded to repaid with the collateral for defaulted loans. This credit crunch will have some unknown effect on Alibaba’s manufacturers. Both the suppliers and sub-assembly suppliers in the PRC manufacturing supply chains are experiencing delays and defaults in the shipping of orders to the West.
Australia has announced that it will start using its vast cache of iron ore to start manufacturing steel. This will hurt the PRC in three ways.

1. China will have a significant new steel competitor.
2. It will mean less iron ore will be sold and delivered to the PRC steel plants in China.
3. China will have less of a dominant share of the global steel industry to reduce its leverage on the threats to the rest of the world.

Many of China’s companies have just been delisted from world-wide stock exchanges impacting access to capital for projects.
The Philippines has apparently moved away from the relationship with the CCP in the past three months to the US over the CCP. The primary stated reason is the PLAN taking control of several islands that belonged to the Philippines in the Spratly Islands chain. CCP has turned several of these islands into military bases.
On the Spratly Island issue, the United Nations ruled in favor of the Philippines and against the CCP, but the CCP ignores the ruling. This has further raised tensions with Japan, Vietnam, The Philippines, Indonesia, India, the US, Europe, and Australia. The tensions seemed to have turned into a backlash.
In addition to the self-induced calamities, China has been ravaged by massive floods. Even worse, one of the biggest dams, Three Gorges Dam, is at risk of failing. Currently, thousands of people are homeless and missing.
The floods, and the reasons above, may lead to further civil unrest which is the biggest fear of the CCP. There are estimated to be 400 million people currently at risk below the Three Gorges Dam. Even the CCP could not cover this dire catastrophe up if the dam fails.

A Risk of a Hot-War with China

There is an increased chance of a “hot war” in the South China Sea.

Currently, the US has two aircraft carrier groups in the area. The US has been conducting “Freedom of Navigation” missions with warships in the disputed South China Sea area. Again, the UN has ruled the South China Sea as open waters, but the CCP ignores that ruling.
India has a new hypersonic missile that is a credible threat to defeat and sink PLAN warships and land-based targets called BrahMos-II. India seems to be joining the US and Australia against the PLA and PLAN. India and China had a deadly border battle on June, 15th of 2020, so tensions are high. It was the most deadly skirmish between the two countries in fifty years.
Many countries have submarines and mine-laying capabilities in the relatively small area.
This week the Russians communicated clear verbal threats to the CCP with the possible use of the new nuclear-capable Avangard hypersonic missile. The Avangard missile can fly as fast as twenty times the speed of sound or Mach 20. Until the US develops laser weapons, there is no known defense of a missile of that speed and that can fly in a non-parabolic or random path to its target. Other countries may have no chance to defend against this weapon.
Japan announced this past week that its new anti-ship stealth missile called ASM-3 is now operational.
Not to be outdone, on 4/30/2020, the Pentagon announced this year that it is coming out with a nuclear-capable missile that is both hypersonic and stealth. However, it is be noted that conflicting reports say this new US missile will “not” carry a nuclear payload. This missile should be deployed by 2023.
The US is now temporarily stationing US Marines on various South Pacific Islands with anti-ship missile batteries to deter PLAN invasions. The Marines will move from is from island to island to reduce the success of a PLA ballistic missile targeting threat.
It appears, other than North Korea, the CCP has no politically capable allies left due to political and military bullying tactics and policies.

Investor Options Concerning China

With the increased risk in the PRC and supply chain risk caused by the banking uncertainty and supply chain disruption, you may want to consider the following.

Invest in promising companies moving out of China. Some companies that are moving out may have a better chance of providing their western customers with a more consistent and predictable supply-chain. All companies want to reduce their risk when possible at a similar price point.
Invest in financial instruments with less risk for the same return. There is clearly an increased macro and microeconomic risk in PRC controlled financial institutions and investments in China.

In summary, Change is opportunity.

Place your bets, but be careful in this fluid economic and political environment.
It appears the CCP has overplayed their hand and the world is reacting.
How will these issues affect the CCP leadership and what will that mean for the rest of the world and the world economy?
Weighing your risk versus your return is as important as ever in 2020.

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