Smaller banks may struggle to weather China’s slowing economy, S&P warns

Some lower-tier city, rural commercial banks may be forced to merge or exit the market, S&P says

Regulators are likely to arrange ‘orderly’ exits, rather than let a small bank fail, the rating agency says

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An advertisement for Baoshang Bank in Beijing, China. In May, the People’s Bank of China seized control of the Baotou-based lender, citing a misappropriation of funds by its largest shareholder. Photo: Reuters

Published: 2:04pm, 28 Aug 2019Updated: 10:57pm, 28 Aug 2019

Tightening financial regulations and a slowing economy as a trade war continues to rage with the United States may force some of China’s smaller banks, including lower-tier city and rural commercial lenders, to merge with larger players or exit the market, S&P Global Ratings said.

In a research note on Tuesday, the credit ratings agency warned that some small and mid-sized banks are less equipped to deal with a “slowing and rebalancing economy” and a changing regulatory landscape. Troubled banks make up about 4 per cent of the sector’s total assets in China, S&P said.

“In our view, Chinese authorities are not, at this stage, comfortable with testing the potential reverberations of letting even a small bank abruptly fail,” S&P credit analyst Liang Yu said in the note. “Rather, we expect regulators would arrange an orderly ‘exit’ if needed through a less-jolting medium: such as through restructuring or a merger with a larger institution.”

In May, the People’s Bank of China seized control of Baoshang Bank, a Baotou-based lender, citing a misappropriation of funds by its largest shareholder. Last month, the Bank of Jinzhou, which has had its Hong Kong-listed shares suspended since April, received government-backed investment from three state-owned financial institutions.

The potential stress on the lower ends of China’s financial system comes as the mainland economy has been slowing this year as the effects of the trade tensions with the US filter into the economy.

Industrial production – a measure of the output of the industrial sectors in China – only grew by 4.8 per cent in July, down from 6.3 per cent in June and well below economists’ expectations. Retail sales also grew at a slower pace in July.