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Finance

Smaller Chinese banks struggling with bad loans

SHANGHAI -- Chinese banks are finding themselves increasingly burdened by nonperforming loans, as recovering funds from borrowers becomes more difficult amid an economic slowdown.

     For instance, Lianyungang Orient Rural Commercial Bank, based in Jiangsu Province, saw bad loans as a proportion of its overall loan portfolio rise 13.74 percentage points to 26.76% in 2013, as clients found themselves on worse financial footing.

     Aware of the danger to the real economy, China's banking regulator has made heading off a financial crisis a priority. It is stepping up oversight while also laying out plans to offer assistance to shaky banks through bailout mergers and other means.

     Based in the regional city of Lianyungang about 420km north of Shanghai, Lianyungang Orient Rural Commercial is a smaller private-sector bank with 9.8 billion yuan ($1.56 billion) in assets and a staff of 656. Changshu Rural Commercial Bank of Jiangsu Province and Bank of Suzhou each hold 11.67% stakes.

     Lianyungang Orient Rural Commercial has 2.05 billion yuan in bad loans, and another 2.7 billion yuan in loans to borrowers classified as "requiring attention," or on the path to nonperformance. The bank blames the increase on the fact that "some companies have suspended operations owing to such factors as slowing economic growth and the slump in imports and exports."

     Retailers and wholesalers make up the largest category of the bank's clients, followed by construction companies. It has filed 273 suits against clients in arrears on loans of 1 million yuan or more, in a string of litigation aiming to claw back some 1.18 billion yuan.

     Chinese authorities have taken action when lenders have found themselves in dire straits in the past. In 1998, Hainan Development Bank became the first to be closed by the government. Another in the Guangdong Province city of Shantou was directed to restructure in 2001. In each case, the government protected deposits.

     But China does not have a deposit insurance system in place, meaning that the concerns of depositors at troubled small banks may send shockwaves through the entire financial system. In Jiangsu, which is home to many feeble small and midsize financial institutions, about a thousand clients joined runs at multiple banks in March.

     According to the China Banking Regulatory Commission, the overall proportion of nonperforming loans for banks in China stood at just 1% at the end of 2013. As some analysts note, however, such figures are subject to manipulation by both regulators and the institutions themselves, and the true proportion could be higher. Lianyungang Orient Rural Commercial Bank's share of bad debt purportedly came to 1.75% in 2011.

     At this point, much hinges on the direction of China's real estate market, and many prominent regional lenders are highly exposed.

     Commission Vice Chairman Wang Zhaoxing told a news conference in Beijing Friday that problems in the real estate market could have disastrous effects on all of China's financial institutions, but called the current risk "manageable." Authorities will beef up oversight of bank lending to the industry, he said.

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