Regulators are downplaying the scale of pain China's failed rural banks can cause. -- China Boss update 7.15.22
Update
What happened.
“A financial scandal in central China has touched depositors across the country, some of whom placed their life savings in four rural banks offering high rates of return, then found their funds frozen as investigators examined allegations of widespread fraud,” The New York Times reported.
NYT:
When the bank customers began showing up to demand their money, the authorities in the city of Zhengzhou tried to use health code apps meant to prevent the spread of Covid-19 to prevent them from traveling.
The city retreated after a backlash, and several officials were punished. But the depositors kept coming, with as many as a thousand gathering on Sunday.
This time the authorities sent in guards en masse to break up the demonstration. They beat the protesters, kicking them to the ground and shoving them onto buses — the harshest response yet to the bank depositors’ efforts to seek redress.
On Tuesday, Reuters reported that, along with harassment and beatings, protesters are also facing job loss as punishment for voicing their anger.
Why it matters.
“More than 39 billion yuan (£5bn; $6bn) is believed to have been frozen, affecting hundreds of thousands of customers” in Henan, the BBC said. That’s not pocket change, but is it a systemic risk that could sink the greater Chinese economy?
Probably not, says Reuters’ Yawen Chen. But it is hugely important as an indicator of the levels of economic stress and failures of oversight that plague China’s financial system.
Reuters:
Last year, the People’s Bank of China identified a group of high-risk lenders that are dominated by this tier of lenders, with some $300 billion of assets between them per the China Banking Association, as well as another 1,500 larger so-called rural commercial banks. All told, about 3,800 rural lenders account for 12% of the industry’s assets.
They are significant lenders to small and medium-size businesses, extending some $740 billion accumulatively as of 2020 as part of a push by Beijing to stabilise jobs. But their average return on assets is just 0.39%, per ANZ analysts, leaving little wiggle room if the economy shrinks.
The central bank, though, excluded them from its contagion risk stress test, and estimated that only 1.4% of total banking system assets might pose a problem.
That may downplay their role. The four village banks in Henan, for example, enticed depositors, many of them out-of-towners, by using flexible terms and high interest rates brokered by third-party apps and internet platforms. That was a widespread practice until regulators banned it last year; some 550 billion yuan ($82 billion) of such products were outstanding by end-2020, per the PBOC.
With nearly 100 million people, Henan is China’s third largest province, and, even though “authorities appear to be pinning blame for the banking issues on a group of “criminals,” others say “the issues facing rural banks in Henan run much deeper than a few bad actors” and that what we’re seeing now may actually be the “tip of the Evergrande iceberg,” Fortune reported.
Fortune:
Since last year, China's government has targeted Evergrande, the bloated property developer, in a broader crackdown on property speculation and unsustainable levels of debt in the real estate sector.
The crackdown made it more difficult for property developers to borrow and therefore less able to purchase land offered for sale by local governments. Property sales are a crucial source of revenue for most provincial and municipal governments in China. Banks too were caught in the credit squeeze. The limits set by the central government forced many regional lenders to call in existing loans from property developers, many of whom were unable to make repayment. Economists say local, rural banks may be the most exposed to defaults compared to larger regional or national banks.
"Small banks are likely to take a bigger hit with more challenges in asset quality due to their higher exposure to real estate and [small and medium-sized enterprises]," Gary Ng, senior economist Asia-Pacific at Natixis, recently told S&P Global.
The run on banks in Henan may just be the start of a broader banking crisis.
"The past two decades in China have seen a real estate bubble of historic proportions, along with among the fastest increases in debt ever seen," Michael Pettis, a professor of finance at Peking University recently tweeted. "This means that what is happening in Henan is simply part of a process that has many years to continue before it is resolved."
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Have a great weekend.