Third Chinese bank rescue of the summer gets underway

Caixin business media reports that Hengfeng Bank, headquartered in Shandong province, is on track to receive funding of 30 billion yuan (4.3 billion dollars) from the provincial government. In addition, the state-owned Central Huijin Investment is expected to acquire a stake in the bank.

The capitalisation of the bank is unsurprising given that Hengfeng Bank’s troubles have been long recognised. The bank has not released a financial statement since 2016. Based on the latest available information, Hengfeng is somewhere in the neighbourhood of China’s 20^th largest bank in terms of total assets, or roughly the same size as the combined assets of the Baoshang and Jinzhou banks recued earlier this summer. One of the largest banks in Southeast Asia, Singapore-based UOB, holds a 13 % stake in Hengfeng Bank. UOB has tried to divest its stake in recent years, but has found no buyers.

Regulators have taken a different approach in the rescue operations of Hengfeng Bank and Jinzhou Bank announced in late July than they used in the Baoshang Bank case in May. In the Baoshang takeover, officials announced that large stakeholders would have to accept some of the bank’s losses. This measure lead to a reassessment of counterparty risk on the interbank market and made access to funding for small and medium-sized banks more challenging. In contrast, when the government decided to recapitalise Hengfeng and Jinzhou with public funds, the market reactions have been fairly subdued. Of course, simply pumping money into a troubled bank is a temporary solution that can only be effective if the bank changes its practices.