China’s regulators put city-level banks and rural lenders on notice after the first state takeover of a private bank since 1998
- Baoshang Bank’s case reflects credit risks hidden in China’s small and medium lenders and more of these issues will surface as regulations are tightened
China’s city banks and rural co-operatives, with the worst credit quality among Chinese lenders, are on notice after last week’s state takeover of Baoshang Bank, as regulators step up their scrutiny to ring-fence the financial system from errant lending and runaway wheeling and dealing.
Friday’s takeover of Baoshang by the People’s Bank of China (PBOC) and the China Banking and Regulatory Commission (CBIRC), where its management will be run by the regulators for a year while financial operations will be underwritten by China Construction Bank, marked the first nationalisation of a non-state lender since the 1998 shutdown of the Hainan Development Bank.
“The move shows that the problem with Baoshang is so serious that it could not be solved by the local authorities,” said Nanjing University’s finance professor Sun Wujun. “Baoshang is just one case that reflects the credit risks hidden among China’s small and medium-size banks in their wild expansion over the past few years.”
Chinese regulators have good reason for concern. The level of non-performing loans among city-level banks, typically licensed to operate within the city limits of urban centres, were at 1.9 per cent of their total lending at the end of March, according to CBIRC data. They were also the least capitalised among all bank categories, with 12.6 per cent capital adequacy ratio, compared with 18.3 per cent in foreign banks.
Rural commercial banks, licensed to serve villages and smaller towns, had 4.1 per cent of their lending classified as bad loans, the data showed. That compared with the 1.1 per cent average among larger nationwide commercial banks, and 0.8 per cent among foreign banks, the data showed.
