Chinese government lends hand to strapped local banks

By Xie Jun Source:Global Times Published: 2019/8/12 21:18:40

Experts suggest targeted policies for small lenders

A view of Hengfeng Bank in Beijing File photo: VCG

Chinese authorities are lending a helping hand to domestic banks that are facing cash crunches via takeovers and other efforts, a practice that has become more frequent in recent years as the slowing economy weighs on lenders.

But more needs to be done, such as arranging comprehensive evaluations of small and medium-sized banks' bad loan ratios and watching out for the negative impact of financial deleveraging on smaller banks, experts said. 

State-owned Central Huijin Investment will make a capital injection into Shandong Province-based Hengfeng Bank, a move widely deemed as a breakthrough in the marketization of the bank, led by the provincial government, reported.  

Hengfeng Bank was repeatedly fined by regulators in 2018 and 2019, after the bank's former chairman Cai Guohua and several other senior executives were put under criminal investigations.

Financial statements released by the bank have shown a deteriorating trend. The bank had assets of 1.05 trillion yuan ($148.8 billion) at the end of September 2018, down 21.2 percent compared with the start of 2018. The bank hasn't updated its financial status. 

Huijin's move to invest in Hengfeng Bank came just months after the People's Bank of China, China's central bank, and China Banking and Insurance Regulatory Commission, the banking regulator, announced that they would take control of Inner Mongolia-based Baoshang Bank for a year to resolve its credit risks. 

The Bank of Jinzhou, based in Northeast China's Liaoning Province, in July transferred some of its shares to three financial companies as it sought strategic investments under the guidance of the local government. The bank was reported to have liquidity problems after some borrowers failed to repay their loans on time. 

Risks exposed 

Experts said that the problem of small and medium-sized banks getting into financial trouble is likely to become more common, and in many cases, these lenders will need government assistance. 

Yang Zirong, an associate research fellow of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, said that financial risks faced by smaller banks expose many problems. 

These problems include the excessive expansion of smaller banks, the cumulative risks of the slowing economy and the negative impact of recent financial deleveraging problems. However, the root cause of the problem is the imbalance between banking structural adjustment and the nation's economic reforms. 

"China's small and medium-sized banks, which were set up mostly to provide financing to smaller enterprises, have mushroomed in recent years. But at the same time, China's economic reforms were relatively slow with social resources flocking to state-owned enterprises and the real estate industry, leaving many smaller companies in operational difficulty," Yang said. 

Dong Dengxin, director of the Financial Securities Institute at the Wuhan University of Science and Technology, said that takeovers or other means of government help, including the introduction of large investors and the implementation of better management, would be effective in helping the those banks weather the storm, at least in most cases. 

Different sizes, policies 

But experts suggested that efforts by the government should go beyond mere capital injections. Instead, the government should consider the special situation of smaller banks when drawing up financial policies. 

For instance, the government's push for smaller banks to support private and micro-sized enterprises by lending more money at lower rates might trigger an explosion in the lenders' financial risks. In the same way, the government's financial deleveraging efforts might intensify the financial burden on some banks whose financial strains are more severe than those of major state-owned banks, Yang said. 

He suggested that the government can establish a special work group to evaluate the financial risks of smaller banks and establish a mechanism to deal with crises, such as that of Baoshang Bank. 

Dong added that there are currently about 4,000 smaller banks, a level where "the survival of the fittest" becomes the norm. "Banks themselves should also enhance their products to deal with heated competition," he said. 

Newspaper headline: Government lends hand to strapped banks


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