China’s rural banks struggling under pressure of overdue loans as slow growth, trade war take their toll
- A total of 29 of China’s rural banks this year have applied to raise capital by selling new shares to replenish their balance sheets in 2019
- Almost a third have reported a non-performing loan ratio of more than 5 per cent, the so-called warning line established by regulators
Faced by the “cliff-like” plunge in the main business of their largest group of clients, which has entered an “unprecedented cold winter period”, the tale in northern Hebei province is one that is replicated across the country, China’s small rural banks are scrambling to raise new capital as they struggle to contain a rapidly rising number of overdue loans.
A total of 10 out of the 29 banks reported a non-performing loan ratio of more than 5 per cent, the so-called warning guideline established by the China Banking and Insurance Regulatory Commission.
Overall, 15 of the 29 banks recorded a rise in their non-performing loan ratio between 2007 and 2018, with some reporting almost five times the maximum ratio allowed by the securities regulator.
There have been a series of domino effects such as the suspension of production, the halting of bank loans, and unemployment of workers
Unlike in the US, takeovers and the selling off of banking assets are very rare in China, largely due to a dominating state presence and local governments being the biggest shareholders in rural banks.
Jiangxi Yushan Rural Commercial Bank filed an application in November to sell 72.6 million yuan (US$10.3 million) worth of shares along with its non-performing loans. In the first half of 2019, the bank’s non-performing loan ratio jumped to 22.98 per cent from just 4.71 per cent at the end of 2017.
The bank cited poor economic conditions and tougher regulations as the main drivers for its borrowers being unable to repay their loans, with many of the businesses concerned having either been forced to close or having been restructured.
The non-performing loan ratio at another rural bank in Jiangxi province, Pengze Rural Commercial Bank, jumped to 8.84 per cent in the first half of 2019, nearly double the 4.83 per cent in 2017.
A large number of cotton spinning enterprises in the county cannot withstand the impact of the market, and the business conditions of some of the bank’s credit customers have deteriorated and overdue problems have led to the company's non-performing loans rising
“At the same time, due to the downturn of downstream textile companies, sales have been difficult, production and sales have weakened, and the pressure on the cash flow of cotton spinning companies has increased.
“A large number of cotton spinning enterprises in the county cannot withstand the impact of the market, and the business conditions of some of the bank’s credit customers have deteriorated and overdue problems have led to the company's non-performing loans rising.”
Fitch Ratings estimated that there are around 4,000 banks, including rural banks, in China that have assets of less than 100 billion yuan (US$14.2 billion) but they account for 20 per cent to 25 per cent of the nation’s banking system assets. After years of rapid credit expansion, they have become increasingly vulnerable to sluggish growth and tight liquidity as their profitability took a deep dive and regulators demanded better risk management to curb debt.
“The reported non-performing loan ratios of small banks are higher than rest of the system, and are also more likely to understate true asset-quality problems,” said Fitch in a report released last month.
Judging from the way they have handled the three banks, there is no clear direction. They seemed to be exploring and testing how best to resolve [the problems]
Following the problems faced by Baoshang Bank, Jinzhou Bank and Hengfeng Bank, regulators have so far been unable to tackle the liquidity problems and weak outlook facing small to medium-sized banks, said Zhu Haibin, chief China economist at JP Morgan.
“Judging from the way they have handled the three banks, there is no clear direction. They seemed to be exploring and testing how best to resolve [the problems],” said Zhu. “It’s possible they may consider mergers, like asking the bigger banks to take over the smaller ones, although currently it doesn’t have a fully market-oriented pricing mechanism for consolidating [the banking sector].
“The market response to [handling of] Baoshang and Jinzhou was negative. Ultimately, there needs to be an exit mechanism for financial institutions. Even though China’s been opening up its financial sector, there’s still a big gap before it is a fully open market.”
