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Banking & Finance

China mobilizes aid for failing banks as local economies slow

Beijing shifts strategy in bid to quell mounting financial risks

Newly manufactured cars are seen at the automobile terminal in the port of Dalian in Liaoning. The province's industrial economy has slowed.   © Reuters

BEIJING -- China is changing tactics as it intervenes to prevent a string of bank failures amid a slowing economy and growing financial risks.

Bank of Jinzhou, based in the northeastern province of Liaoning, was the latest to receive a state-led rescue last month.

But the intervention differed in nature from May's government takeover of Baoshang Bank, which was put under de facto state ownership, roiling China's money market.

China's leadership under President Xi Jinping is on alert for potential causes of financial turmoil, and weak lenders face the prospect of being weeded out amid a consolidation of the banking sector.

When Inner Mongolia-based Baoshang was seized, central bank officials were installed in its management and state-owned China Construction Bank took charge of daily operations. Deposit insurance payoffs left some large corporate account holders at a loss. The seizure was the first government takeover of a bank in China in 18 years.

Beijing appears to be taking a less direct approach on Jinzhou. State-owned Industrial and Commercial Bank of China, as well as debt collection arms of China Construction Bank and Agricultural Bank of China, will together take a roughly 20% stake in Jinzhou.

In effect, three of China's big four state-owned banks will bail out Jinzhou, rather than the government. Six of Jinzhou's leaders have stepped down, while four new ones were appointed by ICBC.

"Things are being handled completely differently from Baoshang Bank," said a staffer at a Bank of Jinzhou branch in Beijing this month. "It is a change of shareholders led by the state, so there's no need to worry."

A Bank of Jinzhou branch in Beijing: the lender was known for offering high interest rates on deposits. (Photo by Issaku Harada)

"The government may be using a different strategy this time because the financial market experienced greater turmoil than expected in the aftermath of Baoshang's rescue," a finance industry source in Beijing said.

Immediately after the government announced its takeover of Baoshang, large interbank loans became harder to obtain and interest rates increased. No such moves happened after the Jinzhou announcement.

Chinese media also reported this month that Shandong Province-based Hengfeng Bank will receive a capital injection from state-run fund Central Huijin Investment. Another regional lender, Bank of Jilin, has agreed to a capital increase from the Jilin provincial government.

All four of these ailing banks are behind on publishing their annual reports, which are due by the end of April every year -- a problem that other lenders share. 

Baoshang and Hengfeng have not issued one since 2016. At least 18 banks failed to meet the deadline for their 2018 reports, according to the state-run Xinhua News Agency. Nikkei has found that nine, including Chengdu Rural Commercial Bank, still had not as of Aug. 13.

Several banks are also suspected of being treated like de facto funding sources for shareholders. Missing financier Xiao Jianhua's Tomorrow Group, which had an 89% stake in Baoshang, allegedly misappropriated over 200 billion yuan [$28.3 billion], a source familiar with the matter said. Xiao reportedly disappeared from a Hong Kong hotel in January 2017 and is thought to be in custody in mainland China.

Bank of Jinzhou and Bank of Jilin counts aluminum tycoon Liu Zhongtian's China Zhongwang group as a major shareholder. Liu faces a U.S. indictment over allegations of dodging metals tariffs. 

Banks are also having a harder time finding borrowers as regional economies slow down, pushing them to invest in high-risk securities. Baoshang, Jinzhou, Hengfeng and Jilin were all on a list of 12 risky banks circulated among financial professionals immediately after Baoshang's nationalization.

China's banks struggled with bad loans toward the end of the 1990s, prompting the government to inject capital into big lenders.

This time around, the country's financial system as a whole remains solid, and the big four state-run banks are sound. But even the smaller banks in trouble often appear fine based on management indicators alone.

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