Mounting Signs of Bank Stress in China Prompt Government Action
On Thursday, Guangdong Nanyue Bank made a rare decision to skip early redemption on its local tier-two bond without giving a reason, sparking fresh concern about its financial strength. Two other banks have faced runs at some branches in recent days amid unsubstantiated rumors on social media that they might fail. Many other lenders are embarking on efforts to bolster capital.
The drumbeat of news is heightening investor concerns about China’s more-than 3,000 small banks, many of which are coping with a mountain of bad loans and a government crackdown on risky funding practices. To prevent panic, authorities are considering a package of measures to shore up any cracks in the world’s largest banking system — a complex challenge.
“The recent incidents forced regulators to address risks at small banks, which are quickly piling up,” said Tan Songheng, head of research at Bank of Sanxiang Co.’s interbank business division. “Each bank has their unique point of risk so any mergers or restructuring attempts will be time-consuming. The regulators can’t deal with all risky institutions at once.”
The plan under development by financial regulators would encourage problematic banks with less than 100 billion yuan ($14 billion) of assets to merge or restructure, people familiar with the matter said Thursday. Local governments would be held responsible for dealing with troubled lenders, with the central bank providing liquidity support if necessary, the people said, asking not to be identified discussing private information.
Investors have been focusing on the health of small lenders since China’s government took over Inner Mongolia-based Baoshang Bank Co. in May, a move that led to losses for some institutional creditors. In the aftermath, borrowing costs for lower-rated banks soared, only subsiding once regulators injected tens of billions of dollars into the financial system. In July, authorities orchestrated a rescue for another struggling regional firm, Bank of Jinzhou Co.
Small troubled banks pose a risk to the Chinese economy, which is already growing at its weakest pace since the early 1990s, weighed down by a multiyear deleveraging campaign and a trade war with the U.S.
“As the economy slows down, small entities not just in banking but also in the brokerage and insurance industries may not be able to survive,” said Liao Chenkai, a Shanghai-based analyst at Capital Securities. “From the regulator’s perspective, merging them would make them larger and hopefully stronger.”
Small Chinese banks tracked by UBS Group AG need an estimated $349 billion of fresh capital — a sum they may struggle to raise without support from the biggest state rivals.
Chinese bank shares are trading at a distressed level in Hong Kong, at an average of 0.65 times their forecast book value. Among the country’s smaller banks, the worst stock performers include Bank of Jinzhou, which has tumbled 66% this year, and Zhongyuan Bank Co., which has dropped by more than half.