California’s imploding Silicon Valley Bank (SVB) had a number of foreign depositors, including tech start-ups in China.
Chinese firms rushed over the weekend to reassure their customers and investors that their exposure in the SVB collapse is minimal, or that they have enough cash on hand to weather any loss of access to their SVB funds.
SVB attracted Chinese customers through a joint venture called SPD Silicon Valley Bank. The “SPD” in the name stands for Shanghai Pudong Development, the bank that partnered with SVB to launch the venture in 2012.
SPD Silicon Valley Bank issued a statement on Saturday saying that it has “sound operations in accordance with Chinese laws and regulations,” and perhaps more importantly, that it has an “independent balance sheet.”
The main SVB bank does have its own Chinese customers, and according to the Financial Times (FT) on Monday, the bank’s collapse took them by surprise because of the time difference between California and Beijing:
The run on SVB happened so quickly — with $42bn leaving the bank’s coffers on Thursday in the US — that by the time decision makers in China were waking up on Friday morning local time, attempts to rescue their money were already in peril.
“We tried Friday morning, but it was already too late. The transfer is still processing,” said the founder of a Beijing-based tech company with about $10mn in limbo. “It’s very crazy, we didn’t think this could happen.”
Several China-based venture capital firms said some start-ups in their portfolios faced similar issues of not being able to access funds stuck in SVB outside of China. The bank’s collapse comes at a particularly tough time for Chinese groups raising foreign capital, with the ecosystem whipsawed by Beijing’s tech crackdown, Covid-19 pandemic controls and rising geopolitical tensions with Washington.
According to CNBC, SPD Silicon Valley Bank had about $290 million in registered capital, which represents about 6.8 percent of Shanghai Pudong Development Bank’s total registered capital.
Chinese business owners told CNBC on Monday that SVB was popular with startups because opening an account was very easy and it gave investors easy tools for monitoring how new companies spent their funds. This helped SVB become a bridge between U.S. investors and Chinese companies, especially fast-moving biotech startups.
“Mainstream traditional banks, such as Standard Chartered, HSBC, Citi have strict compliance and it takes a long time to start a bank account with them. It can take up to 3-6 months,” explained a tech company founder who said he once had “tens of millions of U.S. dollars” at SVB, and still had more than the $250,000 automatic insurance limit as of last week, when the bank was frozen by regulators.
Chinese biotech company BeiGene said on Monday about 3.9 percent of its cash was locked up in SVB, adding up to about $175 million. The news caused BeiGene’s stock to slide 1.3 percent on the Hong Kong index.
TechCrunch reported full-blown “panic” in the Chinese startup industry as companies scrambled to get away from SVB, while Reuters reported Chinese venture funds were “scrambling for alternatives,” possibly including Chinese mega-banks that are “rushing to fill the gap.”
China’s state-run Global Times said the jitters were subsiding on Sunday – provided the U.S. government manages to avoid a “systemic liquidity crisis.”
According to the Global Times, the lesson for investors worldwide is to stay away from American banks:
More or less, the problems with SVB also exist at other American banks, and needless to say, the SVB collapse in just 48 hours will cause customers to have concerns about their own deposits at other small and medium-sized banks.
That is to say, if US regulators fail to properly handle the SVB fallout to curb the ripple effect, market panic will spread and more bank runs will take place. Therefore, the severity of the consequences of the SVB collapse actually hinges on whether US regulators can handle the crisis properly.
Many have likened the SVB collapse to the Lehman Brothers crisis of 2008. However, Lehman Brothers collapsed due to a debt crisis, while SVB imploded due to a liquidity crunch. The fact that SVB’s failure came just days after it was listed in Forbes magazine’s annual ranking of the best banks in America is actually a more worrying sign about the US economy.
“It now seems necessary to advise Chinese companies and investors to watch out for potential risks when it comes to putting money into U.S. financial institutions and assets,” the Global Times tut-tutted.