China’s rust-belt province of Liaoning merges 12 local banks into one ‘first-class’ bank as bad loans mount

Frank Tang
·4-min read

The Chinese rust-belt province of Liaoning will merge a dozen local government-owned commercial banks into one large provincial institution, in the wake of an increase in bad loans caused by coronavirus-induced economic problems last year.

The northeastern province reported the plan this week to the Financial Stability and Development Committee, the overarching financial supervisory agency headed by Vice-Premier Liu He, and will bring in strategic investors for the new institution, according to a statement posted on the website of the People’s Bank of China (PBOC) on Thursday.

The merger will establish a “first-class urban commercial bank” that absorbs the 12 existing local banks on “market-oriented” and “law-based” principles, the statement says.

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The statement did not provide any bank names.

The strategic shareholders include the state-owned Liaoning Financial Holding Group and PBOC’s deposit insurance fund, which have 20 billion yuan (US$3.09 billion) and 10 billion yuan in registered capital, respectively. The statement added that several large national enterprises would also be involved in the financing and restructuring, but none were identified, and it was not clear whether they would be state-owned or from the private sector.

In China, defaults by state-owned enterprises in the last quarter of 2020 suggest that addressing financial vulnerabilities continues to be a priority

International Monetary Fund

The merger marks the latest government moves to support the country’s 4,000-plus small and medium-sized banks, which were hit hard by China’s economic slowdown given their high exposure to their local economies.

U rban and rural commercial banks’ non-performing loan ratios – measuring the rate at which a bank’s loans are not repaid – stood at 2.28 per cent and 4.17 per cent of assets, respectively, in September 2019, the latest government data shows. These ratios were higher than the national average of 1.96 per cent for all banks, including large state-owned institutions.

“In China, defaults by state-owned enterprises in the last quarter of 2020 suggest that addressing financial vulnerabilities continues to be a priority,” the International Monetary Fund said in its global financial stability report on Wednesday.

Debt at China’s state-owned firms in spotlight as credit tightening raises default pressure

In light of more than 3 trillion yuan worth of bad loans in 2020, the nation’s banking regulator – the China Banking and Insurance Regulatory Commission – has vowed to replenish the capital base of small and medium-sized banks. The commission is also encouraging large banks to provide smaller ones with risk-control tool kits, and is promoting mergers and acquisitions among small banks.

Although small banks account for only a tiny proportion of China’s 300 trillion yuan in banking assets, and thus pose only limited direct systemic risk, government seizures and bank runs could shake public confidence in the state-dominated system.

Chinese regulators have used several methods to help struggling banks. Baoshang Bank, a core part of the since-failed Tomorrow Group financial conglomerate, was seized by the central bank in May 2019 and filed for bankruptcy protection after a heavy restructuring. Major state players also joined in, with the China Investment Corp, the nation’s sovereign wealth fund, taking control of Hengfeng Bank, a national joint-stock commercial bank based in east China’s Shandong province.

Liaoning’s bank-merger plan comes as the central government has ordered shareholders and local financial regulators to share in the responsibility for any bank failures. The Liaoning plan has also received the endorsement of the central bank, as opposed to last year’s merger of five local banks by the government of the northern province of Shanxi.

As the heartland of China’s northeastern rust-belt industrial base, Liaoning has long been troubled by a shrinking population and numerous low-efficiency state-owned enterprises. After its economy contracted by 2.5 per cent in 2016, following a major revision after a scandal involving falsified economic figures, its economic recovery was adversely affected by Beijing’s deleveraging campaign to cut debt and risky loans from 2018, followed by the coronavirus pandemic last year.

Liaoning’s economy grew 0.6 per cent last year, lower than the national average of 2.3 per cent and ranking 15th among the country’s 31 provincial jurisdictions.

Investment conditions in the nation’s northeast – including Liaoning, Jilin and Heilongjiang provinces – have been historically poor because local authorities there are said to lack the fiscal resources to save troubled businesses.

Local banks around the country have been under constant financial pressure in recent years. The privately run Yingkou Coastal Bank reported a bank run in November 2019, while the ailing Bank of Jinzhou was restructured by the Industrial and Commercial Bank of China, the country’s largest state-owned bank, the same year.

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