Following years of brisk expansion, China’s smaller financial institutions are seeing hard times as customers turn to larger banks and the local economy slows, the Wall Street Journal (WSJ) reported on Sunday (Nov. 17).
When times are hard, banks that rely on borrowing from the interbank market or distributing bonds are at higher risk than those depending on deposits. China only introduced deposit insurance in 2015.
Smaller banks aren’t seen as “too big to fail,” and combined with interest-rate controls, make bigger institutions more appealing. S&P Global analysts figure that troubled lenders make up about 4 percent of China’s total banking capital. Mergers or shake-ups could cause many to disappear within 24 months.
China’s Harbin Bank is now controlled by the government, as is Baoshang Bank; state institutions took stake in Bank of Jinzhou. There are also other lenders who haven’t filed 2018 annual reports, which could mean the situation is more sweeping.
In May national authorities seized Baoshang Bank, which was connected to tycoon Xiao Jianhua, calling it a “severe credit risk,” the Times reported. This was the first such takeover in more than two decades.
Not only have smaller banks loaned money too generously, but troubling debts continue to escalate as the economic health in China falters. Beijing has also handed down stricter policies regarding overdue loans.
The NYT said that former UBS Global AG analyst Jason Bedford forecasted in July that China’s banks have to “lift core capital ratios to 12.5 percent,” which would mean having to raise $339 billion. Most banks aren’t seeing enough profits to increase capital through retained earnings as stockholders pull back on new share buys.
In June, China’s central bank announced it planned to use several tools to keep liquidity in the market and that it was going to provide liquidity support to small and medium-sized banks. Investors had been jittery ever since late May when the China Banking and Insurance Regulatory Commission took control of Baoshang Bank. That sent the markets in China into a tailspin, prompting People’s Bank of China to inject cash. That led to speculation that more takeovers were coming.