China vows to crack down on high-risk banks as economy’s post-coronavirus rebound slows

Chinese regulators are launching a financial ‘de-risking’ campaign including anti-corruption investigations and macroprudential stress tests
Beijing is concerned about the rising number of bad assets from China’s years-long economic slowdown and the pandemic shock last year

China economy

Frank Tangin Beijing

Published: 5:43pm, 3 Aug, 2021

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Chinese regulators say they will “spare no effort” as part of a clamp down on high-risk financial institutions, including using targeted anti-corruption investigations, amid a flush of liquidity generated by coronavirus-related stimulus and increased fiscal spending.

The move to tighten oversight of lending institutions follows an undertaking last Friday by the 25-member Politburo – the Communist Party’s top decision-making body – to maintain the “continuity, stability and sustainability of macro policies” for the rest of the year as the economy’s post-pandemic rebound slows.

Following their midyear work conferences on Friday, China’s central bank and the China Banking and Insurance Commission (CBRIC) both said authorities would launch a “de-risking” campaign involving anti-corruption investigations, the assessment of countercyclical capital buffers, and macroprudential stress tests.

The campaign would “actively deal with the rebound of non-performing assets”, CBRIC said in a statement on its website.

We must spare no effort in preventing and tackling financial risks

CBRIC

“We must spare no effort in preventing and tackling financial risks,” the banking regulator said.

“Tailor-made measures should be deployed for each bank and region to accelerate the disposal of high-risk institutions.”

Regulators have historically targeted smaller “rogue” banks, but would this time pay greater attention to big lenders, the regulators said. There was no indication of how the heightened supervision would affect borrowers.

China’s small banks have been under the microscope since May 2019 when the government took over Baoshang Bank, a small lender in the autonomous region of Inner Mongolia, triggering a crisis of confidence over the potential credit risk posed by hundreds of similar lenders across the country.

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Many of these small banks were subsequently deprived of risky cross-region business and restricted from lending to local government financing vehicles and the property sector.

Without further regulation, these banks could be further exposed as the world’s second largest economy heads towards an economic slowdown after strong growth of 12.7 per cent in the first half of the year, the regulators’ statements said.

The use of anti-corruption investigations, a historically unconventional tool, reflects Beijing’s determination to defuse risks and maintain economic stability.

At last week’s meetings, regulators said they would start implementing a Politburo request to hold provincial governors and mayors accountable for life over financial risks in their jurisdictions.

Authorities have in recent months pressed ahead with a number of high-profile corruption investigations.

The Central Commission for Discipline Inspection said in May five top officials at the CBIRC branch in Inner Mongolia were found guilty of taking bribes worth 700 million yuan (US$108 million), most of which came from Baoshang Bank.

While last week, the former deputy chairman of the banking regulator, Cai Esheng, was placed under investigation for suspected violations of party discipline.

CBIRC issued more than 1,000 infringement tickets and fines of 1.16 billion yuan in the first half of the year.

According to the 2020 financial stability report released by the People’s Bank of China (PBOC), about one third of China’s 1,520 small and medium-sized banks would fail a stress test if the non-performing loan ratio was doubled.

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The bad loan ratio among China’s commercial banks rose to 1.86 per cent at end-June from 1.80 per cent a quarter earlier, though it remains at a “controllable” level, government data showed.

Rural commercial banks registered a far higher ratio of 3.7 per cent at end-March, versus 1.47 per cent for large state-owned banks.

More than 11 small banks have been downgraded by domestic rating agencies on the basis of deteriorating asset quality this year, including four in the northeastern rust belt province of Liaoning and three in the coal-rich province of Shanxi.

At its work conference, the PBOC said it would undertake macroprudential stress tests – used to measure risk resistance – in tranches, and establish an annual assessment mechanism for countercyclical capital buffers.

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It also vowed to enhance supervision of systemically important banks. The banking regulator, meanwhile, said it would ask large banks to begin registering their wealth management subsidies as separate entities.

The list of banks subjected to further regulation and scrutiny has not been announced, but is expected to include China’s Big Four banks, 12 nationally significant joint-stock commercial banks and a few large city commercial banks, analysts said.

Zheng Liansheng, a researcher at the National Institution for Finance and Development, said regulators have begun paying closer attention to cases of “too big to fail” and “small is easy to fail”.

“We must have contingency plans to deal with risks of individual institutions in a short period of time and prevent them from contaminating other institutions or markets,” he said in an online lecture last week.

This article appeared in the South China Morning Post print edition as: China vows to scrutinise ‘high-risk’ institutions