Welcome to this week's bullion update at SD Bullion were we examine Bank Runs in China past, present, and potential future.
The image above is a just recent illustration we will uncover here. It helps to trace some od China's past to present in gold bullion stacking and in being the inventor of fiat currency issuance back when great Khans ruled their empire.
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The black and white image shown at the start of this bullion market update, was taken in Shanghai, China in December of the year 1948.
Only a few months before Mao Zedong established single-party rule which has been with the modern Communist Party of China ever since.
This was a classic Chinese bank run, as the then supposed gold yuan fiat currency was becoming worthless due to war expenditure induced hyperinflation. Back then the soon to be ousted Nationalist government decided to issue 40 grams of gold per person in line. That is just shy of a 1 and third troy ounce of gold.
As the photo illustrates, that day thousands of Chinese came out and waited in line for hours. The police, equipped with the remnants of the armies of the International Concession, made only a gesture toward maintaining order. On the day, a reported ten people were crushed to death.
China appears to now be on the fastest track to issuing a new Central Bank issued digital cryptocurrencies today. The youth of modern-day China in high percentiles, only use digital currency payment systems. Perhaps many of them are unaware of their own nation’s history.
China was the first nation to issue fiat currency under Kublai Khan in the year 1260.
The Yuan dynasty in China spanned just over one century of time following this. Its government-issued attempted to prohibit all transactions in or possession of silver or gold, which had to be turned over to the government. Devaluations and hyperinflation caused the government to replace the existing paper currency with a new one in 1287, but inflation that resulted from undisciplined printing remained a problem for the Yuan court until the end of the Yuan dynasty.
Turning to modern times. Throughout 2019, China has nationalized a handful of local banks. That has not happened in over 20 years of time. The trouble is, this trend appears to build into the next decade.
Before we get deeper into these troubling Chinese banking trends.
A quick update on precious metals prices for the week.
The silver spot price closed with some strength this week priced at $17.23 per troy ounce in fiat Federal Reserve notes.
The gold spot price closed up basically flat up a couple of buck per troy ounce, priced around $1,480 per troy ounce.
And the palladium price made an intraweek-run for two thousand but fell short and pulled back hard to close the week around $1,855 per troy ounce.
And finally, the gold-silver ratio tightened into the 85 range requiring than many ounces of silver to acquire one ounce of gold. Still near 30 year high levels at the moment.
Now back to the Chinese dilemma ongoing.
Today, China has more than 4,500 local banks, and their market share has grown since 5,000 year low-interest rate policies forced the search and reach for yield there too.
Over the last few years of low interest rate policies, many Chinese savers have moved their wealth into higher more risky savings accounts which have often promised twice the interest rates that any of the big four Chinese banks were often offering.
But given there sheer speed of yuan credit and currency creation since the 2008 global financial crisis. More so than ever, almost all Chinese small and local bank books remain highly questionable for global ratings agencies. Yet small banks in China matter to the Chinese economy because of their close ties to larger lenders and their huge base of mom-and-pop savers and investors.
If we start seeing further and larger bank nationalizations as smaller to larger Chinese banks suffer from further bank runs in 2020 and beyond, the Chinese could suddenly be faced with their very own "Lehman moment", as their interbank market lending freezes some day.
This week we saw allegations from various sources online, that even one of the big four Chinese banks was having a run on withdrawals at a local branch earlier this month, December 2019.
The large Chinese bank under question in this video footage above is China Construction Bank.
One of the big four Chinese banks cited on the Bank for International Settlement’s Financial Stability Board’s Global Systematically Important Bank list of 30 megabanks.
Watch our potential Bank Bail-In report from late last week for more information on this G-SIBs importance to the Global financial system at large.
The failure of even just one G-SIB could bring about wide ranging negative implications for the entire global economy.
Stories like these are often stricken from the record within China and as well often too in the west. The reason is so not to induce further potential bank runs or stability concerns. Much like the western internet has become a monopoly dominated censored environment, the internet in China has for decades now been a tightly controlled environment. There are armies of Chinese state officials policing any potential critics, approving positive internal propaganda as the only ongoing mantras of acceptable discourse.
This following recent story of an alleged Chinese corrupt official was also censored in China, yet many here in the west watching this video, you may recall seeing news of it only a few months ago.
In late September the now ex-mayor of Chinese Hainan province, Zhang Qi, was found to be on the take. Allegedly having stashed over 13.5 tonnes of gold bullion (close to $650 million in value currently). Now facing the threat of death by execution, Zhang Qi allegedly had stashed away nearly $38 billion in fiat yuan cash and paper assets on his books.
Qi, is just one amongst many of the latest targets of an ongoing corruption crackdown by Chinese President Xi Jinping. Critics allege the thousands of corruption targets are merely an effort to consolidate power for the CPC declared Chinese emperor for life.
Remember that in communist China, even late last century it was illegal for Chinese citizens to own bullion without authorization to do so.
One is left to wonder going into next decade, in what Chinese financial crisis scenario might the CPC resort to past historic private gold nationalization tactics while perhaps continuing to issue more fiat yuan currencies, perhaps the next machinations to come in the form of some new state sanctioned crypto yuan laced with the supposed ‘backing’ of much of the gold it may eventually nationalize.
A bullion buyer years before the 2008 Global Financial Crisis, James Anderson is a grounded precious metals researcher, content creator, and physical investment grade bullion professional. He has authored several Gold