Expect Beijing to rescue more of China's troubled small banks, say analysts, as Harbin Bank becomes the latest to receive a state lifeline

South China Morning Post Dipublikasikan 04.11, 19/11/2019
Expect Beijing to rescue more of China's troubled small banks, say analysts, as Harbin Bank becomes the latest to receive a state lifeline

China's troubled small banks could face more state intervention after yet another city lender, Harbin Bank, received support from government-backed shareholders, moving it to within an inch of being majority-owned by the state, analysts said.

Two investment firms wholly-owned by the Heilongjiang provincial government in northern China increased their stakes in Harbin Bank, a midsize commercial bank based in the province's capital and listed in Hong Kong, to 48.18 per cent in total from 19.69 per cent, according to a stock exchange filing published late on Friday night.

Shares of Harbin Bank jumped 7.3 per cent to close at HK$1.62 per cent on Monday.

Six private shareholders transferred the shares, worth 15 billion yuan (US$2 billion), to the firms and in doing so gave up their stakes in the lender. Three of the previous owners had close connections to Tomorrow Group, a mysterious, sprawling business empire controlled by tycoon Xiao Jianhua, Chinese media outlets including Caixin have reported. Xiao went missing in Hong Kong in January 2017 and has been investigated by Chinese authorities, the Post reported previously.

The move to step up the state's presence in Harbin Bank is yet another sign of the difficult times faced by the 3,000 or so small banks in China - including medium-sized city commercial banks and smaller rural lenders - amid the slowest economic growth in almost three decades. It came after Chinese authorities extended lifelines to at least three lenders, including the central bank's takeover of Baoshang Bank in May, which shocked the market as it was the first bank seizure in 20 years.

"The risk conditions for China's small- and medium-sized banks are very worrying based on our research," said Yu Lingqu, a researcher at Shenzhen-based think tank the China Development Institute, who specialises in the financial sector.

"It could be a calamity to the local economy if Harbin Bank goes down - that's why the government took the relief measure, to prevent financial risks from spreading into the real economy," he said.

Judging from the past, the government tends to step in either when a bank is controlled by individuals accused of corruption, or when a lender's balance sheet deteriorates organically, according to Thomas Gatley, a senior analyst at Gavekal Research, a global investment research firm.

Beijing's crackdown on the country's increasingly wayward shadow banking system - comprising institutions such as peer-to-peer lending platforms and wealth management product issuers - has hurt liquidity among private firms that struggle to gain credit from the big banks or refinancing from the bond market, Gatley said.

A wave of corporate bonds maturing this year is also weighing on the firms and thus damaging the asset quality of smaller banks, whose customers are usually local private companies.

"I wouldn't be surprised if the PBOC (People's Bank of China) steps in directly again," said Gatley, referring to the central bank. There "will definitely be more" proactive state interventions into the small banks, while Beijing could take more action as provincial governments face increasingly difficult liquidity conditions, he said.

Yu agreed that Chinese authorities are taking a more active role in defusing debt bombs at the banks. In the past, regulators "pressed the covers tight" so that not a trace of financial risk surfaced, and quietly handled any bad assets. Now the watchdogs are instead actively exposing and managing the risk, shifting towards a more market-oriented and rule-based system, he said.

Logan Wright, head of think tank Rhodium Group's China markets research, said that the question of who will pay for these rescues remains unanswered.

"After problems within the banking system are apparent to most observers and understood to be more widespread, the logic of every successive bailout and restructuring becomes less compelling because it just adds to the government's eventual costs without strengthening the stability of the system overall," said Wright.

It is unclear how bad Harbin Bank's balance sheet is, though. Its non-performing asset ratio had climbed to 1.89 per cent by the end of June from 1.73 per cent at the end of 2018, according to exchange filings. That is on par with China's industry average of 1.86 per cent.

The fact the market still does not fully understand the risk beneath Harbin Bank's balance sheet shows traces of the old mindset of hiding risks, Yu said.

The brokerage violated rules to provide funding for its parent, a unit of CEFC China Energy, the China Securities Regulatory Commission (CSRC) said in a statement. The acquisitive conglomerate was formerly controlled by oil tycoon Ye Jianming, who disappeared in 2018.

The brokerage's business has been taken over by Guotai Junan Securities, while the risk has been contained effectively, the CSRC said.

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