Is China’s Financial System About to Have It’s ‘Too Big to Fail’ Moment?

China has been a market powerhouse for over a decade now. All thanks to their hybrid system of state control and rampant capitalism, they’ve built a towering economy.

But the country’s monstrous economic growth looks to be teetering.

Proof of this lies in the recent seizure of the company’s 4th largest insurance company: Tomorrow Holding Company.

In a story first broken by Bloomberg (paywall), it appears that all is not right with the world’s second-largest economy.

  • Nine firms controlled by disgraced businessman Xiao Jianhua’s crumbling empire, Tomorrow Holding Co. were seized by Chinese authorities.
  • The total assets of the firms were more than 1.2 trillion yuan ($171.5 billion) in value.
  • Xiao was taken into custody three years ago by Chinese authorities at Hong Kong’s Four Seasons hotel and hasn’t been seen in public since.

That’s scary stuff.

And it could be so bad that some are starting to question whether recent moves by China’s Communist Party rulers aren’t the first dominos to fall.

This Isn’t the First Time China Has Seized a ‘Too Big To Fail” Firm

Your Bottom Line

According to investment group CLSA, 11 insurers—holding about 15% of the market and 2.4 trillion in yuan—are “walking a tightrope” with regulators. In fact, were their asset value was a mere 2-5% less than what they showed in 2019, their surplus capital would vanish.

It simply goes to show that if the government ever needed to rescue all these companies at once, the overall cost would be exorbitant. And if the government couldn’t rescue them all, they’d have to dump their assets, which would inevitably threaten the financial system.

Put simply, we could be about to witness the ‘popping’ of the bubble that has become China’s Shanghai’s Stock Exchange Composite Index (SHCOMP):

Leave a Reply

%d bloggers like this: