The History of Financial Failure Waves: A Historical Review of Three Risk Resolutions in China's Financial Industry

📌 Core Thesis The essence of finance is risk management, and financial history is, in some sense, a history of risk exposure and resolution. Looking back at the trajectory of China’s financial industry over the past forty years, it has not been a smooth upward line, but rather a path marked by periodic “scraping the bone to cure the poison.”

The industry generally summarizes China’s major financial risk resolutions into three landmark “failure waves” and risk resolutions:

• First (1998-2000): GITIC bankruptcy and non-bank institution rectification — breaking the “paternalistic” implicit guarantee myth
• Second (2004-2007): Brokerage comprehensive rectification — from “technical bankruptcy” to modern investment bank reconstruction
• Third (2017-present): Small financial institution and shadow banking risk mitigation — breaking interbank rigid redemption, moving toward market-oriented resolution

These three resolutions not only reshaped the competitive landscape of China’s financial industry, but also profoundly advanced the regulatory philosophy from “administrative bailout” to “market-oriented, rule-of-law-based resolution.”

The First Resolution (1998-2000): GITIC Bankruptcy and Non-Bank Institution Rectification

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1. Historical Background: Wild Growth and the Approaching Storm

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In the early 1990s, China’s financial industry was in an exploratory period of mixed-operation. Local governments and ministries established trust and investment companies and urban credit cooperatives, which often served the purpose of “channeling funds” to local financing vehicles or real estate projects. Due to the lack of effective regulatory constraints, blind expansion, high-interest deposit-taking, and illegal interbank lending became the norm.

The 1997 Asian Financial Crisis, with external shocks compounded by internal asset quality deterioration, caused the capital chains of some aggressively expanding financial institutions to break completely.

2. Landmark Events: GITIC Bankruptcy and Hainan Development Bank Closure

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3. Historical Significance: The First Break of “Government Implicit Guarantee”

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GITIC’s bankruptcy was epoch-making. It sent a strong signal to domestic and international markets: the Chinese government would not provide unlimited bailouts for the commercial debts of financial institutions.

This move effectively curbed moral hazard in the financial sector and reaffirmed the principle that local governments could not provide external guarantees. Thereafter, China established a strict tone of separate operation and separate management across banking, securities, and trust, laying the foundation for a modern financial regulatory system.

💡 Historical coordinate: GITIC’s bankruptcy was the first real attempt at “breaking rigid redemption” in China’s financial history. Although it still carried heavy administrative intervention at the time, its “no bailout” stance planted the institutional seed for Baoshang Bank’s bankruptcy two decades later.

The Second Resolution (2004-2007): Brokerage Comprehensive Rectification

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1. Historical Background: The Industry’s “Darkest Hour”

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From 2001 to 2005, China’s capital market endured a four-year bear market. Lacking compliance constraints, a large number of securities firms, in order to survive and expand, commonly resorted to misappropriating client trading settlement funds, illegally conducting principal-guaranteed wealth management, and illicitly speculating in government bonds.

By the end of 2003, the securities industry was loss-making across the board; some leading institutions were, in practice, in a state of “technical bankruptcy,” and systemic risk was on the verge of erupting.

2. Landmark Events: China Southern Securities and Others Placed Under Administrative Receivership

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On January 2, 2004, China Southern Securities — once hailed as the “aircraft carrier” of brokerages — was placed under administrative receivership due to massive illegal shortfalls. Subsequently, dozens of troubled brokerages, including Huaxia Securities, Mingfa Securities, and Hantang Securities, were successively taken over, restructured, or liquidated.

3. Historical Significance: Reshaping the Industry Ecosystem and Institutional Foundation

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Facing the crisis, regulators did not simply “shut them all down,” but launched an unprecedented “brokerage comprehensive rectification”:

• Protection mechanism: Established the Securities Investor Protection Fund, creating for the first time an institutionalized protection net for individual investors
• State capital injection and restructuring: “National team” entities such as Central Huijin and China Jianyin Investment entered the market to strip and restructure quality assets (e.g., establishing China Investment Securities based on part of Southern Securities’ assets)
• Establishing compliance bottom lines: Fully implemented the third-party custody system for client margin,彻底杜绝ing the possibility of misappropriating client funds; simultaneously promoted the “one participation, one control” policy to optimize industry shareholding structure

💡 Institutional legacy: This resolution not only resolved systemic risk, but also forced securities firms to complete joint-stock restructuring, ushering in a subsequent wave of listings and a golden period of development. The establishment of the third-party custody system fundamentally altered the risk DNA of the brokerage industry.

The Third Resolution (2017-Present): Small Financial Institution and Shadow Banking Risk Mitigation

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1. Historical Background: The Cost of Financial Deleveraging and Cross-Industry Expansion

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Around 2015, in the name of financial innovation, some small and medium banks and private financial holding groups blindly expanded across industries through interbank business and asset management channels, forming a complex “shadow banking” system.

With the full launch of “financial deleveraging” in 2017 and the introduction of the “Asset Management New Regulations” (资管新规), capital idling was curtailed, and institutions highly dependent on interbank liabilities with large amounts of non-performing assets on the asset side rapidly exposed severe liquidity crises.

2. Landmark Events: Baoshang Bank Bankruptcy and P2P Full Clearance

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Baoshang Bank (2019-2020):

• On May 24, 2019, the PBOC and former CBIRC jointly announced that Baoshang Bank would be placed under receivership due to serious credit risk
• In 2020, Baoshang Bank formally entered bankruptcy proceedings; its RMB 6.5 billion in “Tier 2 capital bonds” was fully written down
• This was the first truly meaningful commercial bank bankruptcy and exit case since the founding of the PRC

P2P full clearance:

• The once rampantly growing P2P online lending industry was fully cleared to zero
• High-risk trust companies such as Anxin Trust and Sichuan Trust entered prolonged restructuring and risk mitigation

Nine financial institutions simultaneously taken over (2020):

• On July 17, 2020, the CSRC and CBIRC placed 9 financial institutions — including New Era Securities, Guosheng Securities, Huaxia Life, and Tian’an Life — under one-year receivership

3. Historical Significance: Limited Breaking of Rigid Redemption and Rule-of-Law Exit

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The Baoshang Bank incident was an important watershed in China’s financial history:

• Breaking interbank rigid redemption: For the first time, regulators imposed loss-sharing on large institutional creditors and subordinated debt investors, upending the long-held market belief that “financial institutions never fail”
• Market-oriented, rule-of-law principles: The resolution process introduced the Deposit Insurance Fund and, through “purchase and assumption” (e.g., Huishang Bank acquiring Baoshang’s相关业务), maximized protection of ordinary depositors while making violating shareholders pay the price, establishing a standard paradigm for subsequent small-bank reform

💡 Watershed significance: If GITIC’s bankruptcy broke the “government bailout” myth, then Baoshang’s bankruptcy broke the “financial institutions never fail” belief. Separated by more than twenty years, the two together form the complete arc of China’s financial risk resolution evolving from “administrative dominance” to “rule-of-law dominance.”

In-Depth Review: The Evolution of Regulatory Philosophy Behind the Three Resolutions

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Reviewing these three risk resolutions, one can clearly see the maturation and evolution of China’s financial regulatory philosophy:

Evolution 1: From “Administrative Paternalism” to “Breaking Rigid Redemption”

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Early risk resolutions were often accompanied by implicit government bailouts, which, while maintaining short-term stability, bred severe moral hazard. From GITIC’s “no bailout” stance to Baoshang’s Tier 2 bonds being “fully written down,” regulators gradually established the “seller diligent, buyer self-responsible” market-oriented principle, allowing risk pricing to return to reality.

Evolution 2: From “Campaign-Style Rectification” to “Institutional Construction”

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The rectifications of the 1990s were more “firefighting-style” administrative shutdowns; the 2004 brokerage rectification gave birth to the Investor Protection Fund and third-party custody system; today’s small-bank risk mitigation relies on the advancement of the Financial Stability Law, the improvement of the deposit insurance system, and the standardization of the PBOC’s lender-of-last-resort mechanism. The risk resolution toolbox has become increasingly rich and law-based.

Evolution 3: From “Treating Symptoms” to “Addressing Root Causes” via Beneficial Ownership Penetration

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Past risks mostly originated from business-level violations (e.g., misappropriating margin). In recent years, risk exposures increasingly point to corporate governance failure and shareholder-related fund occupation (e.g., the control of financial institutions by the Tomorrow Group and Anbang). Current regulation places greater emphasis on “penetrating supervision,” strictly controlling financial holding companies, and curbing at the source the practice of major shareholders treating financial institutions as “ATMs.”

Latest Development in 2025: Accelerating “Quality Through Quantity Reduction”

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In 2025, the pace of small and medium bank reform and risk mitigation accelerated markedly:

• Banking financial institution legal entities: At end-2025 totaled 3,619, a decrease of 676 from end-2024
• Rural small and medium banks: Decreased by 670 in one year, a decline of 18.6%
• Exit structure: 231 village banks, 81 rural commercial banks, 71 rural credit cooperatives — over 400 in total
• First entry of state-owned big banks: ICBC acquired Bank of Jinzhou; 192 rural credit institutions in Jilin were renamed as Agricultural Bank of China branches

⚠️ Important distinction: The 2025 “exit wave” was not a panic-driven “failure wave,” but a structural reorganization driven by both policy guidance and market spontaneity. It is fundamentally different from the 1998 HDB collapse or the 2006 Southern Securities bankruptcy: the former is orderly exit; the latter was a crisis eruption.

Conclusion: Building the Financial Safety Net in Dynamic Balance

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The resilience of a financial system lies not in never encountering risk, but in possessing the capacity to timely identify, isolate, and resolve risks. Each of China’s three financial risk resolutions was accompanied by growing pains, yet each also drove the industry’s rebirth through fire and institutional upgrade.

Standing at the current juncture, facing the multiple challenges of macroeconomic transition, real estate market adjustment, and local debt resolution, preventing and resolving financial risks remains an eternal theme of financial work. Future financial regulation will continue to adhere to the principle of “stabilizing the overall situation, coordinating planning, implementing classified policies, and precisely defusing risks,” while guarding the bottom line of no systemic risk, deepening supply-side structural reform in finance, and guiding financial resources to more efficiently serve the high-quality development of the real economy.

💡 Core assessment: So-called “financial failure waves” were never a failure of the financial industry, but rather an inevitable process of self-purification. Each resolution paved the way for healthier development in the next cycle.

For financial institutions, the lessons of history are etched in memory:

• Do not overestimate “license value”: A financial license is not an amulet against death
• Do not underestimate “corporate governance”: The era of private capital hollowing out financial institutions is over
• Do not rely on “rigid redemption”: Breaking rigid redemption is an irreversible historical tide
• Do not ignore the “scale trap”: The small, scattered, and weak institutional model has reached its end

History proves that only a financial system that dares to confront risks and has the courage to purge deep-seated ills can truly travel far and steady.

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