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Stocks

Chinese regional banks plan IPOs as bad loans loom

SHANGHAI -- Chinese regional banks are turning to the stock market to shore up their capital bases ahead of an anticipated surge in bad loans amid a slowing economy.

     The China Securities Regulatory Commission has greenlighted initial public offerings for eight regional banks, with applications pending for five more. Bank of Hangzhou is expected to debut in Shanghai as early as this year.

     Small and midsize banks largely serving rural areas also plan to list, including Jiangsu Changshu Rural Commercial Bank and Wuxi Rural Commercial Bank. Some, such as Jiangsu Jiangyin Rural Commercial bank, are considering listing on a market for smaller businesses on the Shenzhen Stock Exchange.

     Nearly all of the 16 banks listed in mainland China are large or second-tier state-owned commercial firms. Most of those looking to join their ranks are significantly smaller, with assets in the tens of billions of yuan to hundreds of billions of yuan. Domestic institutional investors, such as insurers, and retail investors will likely be the main buyers.

     This trend owes partly to the Chinese government. The securities regulator accelerated approvals of bank IPOs in anticipation of an increase in bad loans. Nonperforming loans at Chinese banks reached a record 1.27 trillion yuan ($197 billion) at the end of 2015.

     While bad loans make up less than 2% of total lending, many consider the situation worse than it looks when loans in danger of turning sour are taken into account. Local governments and companies affiliated with them are among the major shareholders at many of these smaller banks, and low-margin infrastructure loans made to these entities could go bad.

     Given that the economy is cooling as well, "more than a few banks are under pressure in terms of capital," an analyst at Ping An Securities said.

     Plans to tackle China's industrial overcapacity and let unprofitable "zombie" companies fail could exacerbate the problem. If financially weak small and midsize regional banks stumble under the burden of bad loans, the impact could damage the broader financial system. The government hopes to let those banks pre-emptively shore up their finances.

     But whether this will go according to plan is unclear. Chinese regulators may limit the pace of IPOs out of concern that too many new listings could leave the stock market awash in supply.

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