Could a banking crisis erupt in China? The commonly accepted answer among western analysts is no, for the simple reason that China has huge State owned banks that dominate the country’s banking industry. But dig a little deeper and a different picture emerges.
It turns out that within China’s smaller cities, the market share of the big banks fades away. Instead, local banks take over. With few national branches, these local banks will have a much more difficult time spreading risk geographically, and are thus more prone to failure.
While there is very little information on local finances, we examined the IPO prospectuses for several banks about to list in Hong Kong and unearthed a treasure trove of information on the geographical breakdown of China’s banking system.