Massive public spending on rescuing China’s troubled banks

Policy measures adopted to deal with the coronavirus pandemic, debtor problems in servicing loans and banks bracing for a rise in non-performing loans (NPLs) reduced bank profits by about 25 % y-o-y in second quarter. Most bank earnings were generated through normal banking functions. The narrowing of the loan-deposit interest rate margin by about 10 basis points from last year to 2.1 % ate directly into bank profits. Although banking supervisors have warned in recent months of a significant NPL build-up, banks have reported only a slight increase in them. However, the actual amount of non-performing receivables is estimated substantially larger than what banks report. Banks expect difficult conditions to continue at least through the end of the year.

While China’s largest banks seem to be in fairly good shape, the condition of small and mid-sized banks, many of which have grown quite rapidly, is troubling. Many of these banks has relied on funding from the interbank market and taken on too much risk in their lending. A number of small and mid-sized banks were already in trouble well before the coronavirus pandemic. In May 2019, officials took over the regional Baoshang Bank. The rescue operation took around a year and, according to the Caixin news agency, required 170 billion yuan (about 21 billion euros) in public assets. The deposit insurance fund, set up and operated by the PBoC, was the main source of funding for the operation. Baoshang was allowed to go bankrupt this summer after some parts of the bank were sold off to Huishang Bank in spring and the rest of Baoshang operations were transferred in May 2020 to the newly created Mengshang Bank. In August, the government had to use nearly 10 billion yuan from the deposit insurance fund to prop up Huishang Bank.

Several decisions, which had made last year to restore the health of certain troubled banks, were implemented this spring. Hengfeng Bank was recapitalised with a 100 billion yuan private placement to state and private investors. Of that, 60 billion yuan in shares went to Central Huijin Corporation, which is administered by the finance ministry. Another 36 billion yuan in shares went to the Shandong local government administration. The placement made Central Huijin the bank’s largest owner with a 54 % stake. In spring, the Chengfang Huida Corporation, which is administered by the People’s Bank of China, became the largest shareholder in Bank of Jinzhou, with a 5 billion yuan private placement. At the same time, Chengfang Huida used 45 billion yuan to clean up Jinzhou’s balance sheet by acquiring the bank’s loan portfolio with a nominal value of 150 billion yuan. Also this spring, the Bank of Gansu announced that it was strengthening its balance sheet with a private placement to several entities tied to local governments. The measures received approval from officials and the shareholders’ meeting, but the actual placement has yet to take place. The ownership structure of Bank of Harbin was also revised last year so that major share of ownership was transferred to the local government.

In addition to the above mentioned bailouts, the government decided in July to earmark 200 billion yuan in financing for small and mid-sized banks from local governments to use special bonds issue this year. In total, at least 500 billion yuan (approximately 60 billion euros, the equivalent of 0.5 % of GDP) in public assets have been earmarked for or spent on bank bailouts. Additionally, some small banks have suffered deposit runs, but it is unknown whether the central government or local governments have had to rescue these banks. In addition, there suspicions that not all government support to banks have come to the public’s attention. Financial entities other than banks have had to be bailed out as well.