The seizure of the Inner Mongolia-based Baoshang Bank by the People’s Bank of China (PBoC) on May 24 indicates that small Chinese banks may be facing rising credit risks, according to Natixis, a French corporate and investment bank.

Gary Ng at Natixis Photo: Asia Times

“After the PBoC’s takeover, the Baoshang Bank’s risks have been manageable and will not lead to nationwide systemic risks,” Gary Ng Cheuk-yan, an economist specializing in Asia Pacific corporate & investment banking at Natixis, said in a Hong Kong media briefing on Monday. “However, there is a higher chance that some smaller banks are facing default risks.”

Citing media reports, Ng said more than 10 rural and city commercial banks have recently delayed their annual report announcements, raising concerns that they may be having liquidity problems. He said some credit events will happen if these small banks’ assets deteriorate further.

Baoshang Bank, owned by Chinese financier Xiao Jianhua, has been taken over by China’s banking regulators for one year starting from May 24, due to “serious credit risks,” according to a joint statement by the People’s Bank of China and the China Banking and Insurance Regulatory Commission. The bank’s business will continue as usual after the takeover and its customers can still use their ATM cards for transactions, the statement said.

On the same day, the PBoC registered its deposit insurance fund, which was launched in 2015 to protect depositors with up to 500,000 yuan (US$72,420) in their bank accounts, as a separate company with registered capital of 10 billion yuan, Chinese media reported on May 29, citing a statement about industrial and commercial registration.

The People’s Bank of China Photo: iStock

According to data compiled by the PBoC’s Financial Stability Bureau earlier this year, 4,017 Chinese banks had joined the deposit insurance fund of 82.12 billion yuan by the end of 2018. No claim has been recorded.

Some small rural and city commercial banks are facing serious credit risks and are technically on the brink of bankruptcy, Quanshangcn, a unit of Securities Times, reported on May 29, citing an unnamed regulatory official. These institutions should be allowed to exit the market orderly under market rules, the official said.

However, Quanshangcn published an apology on May 30, saying the unnamed regulatory official was falsely quoted. Mainland media were ordered to take down the Quanshangcn report.

Reuters reported on May 30 that over a dozen small lenders have not published their annual or quarterly reports this year. They include Bank of Jinzhou and Bank of Jilin, which failed to respond to media enquiries.

Xu Jianwei at Natixis. Photo: Asia Times

The Baoshang Bank incident will still have a negative impact on the market as investors are concerned about the worsening asset quality and capital adequacy of certain small- and medium-sized Chinese banks, said Xu Jianwei, director and senior economist in corporate and investment banking at Natixis.

Xu said PBoC may choose not to bail out all the defaulted banks as such a move would result in a moral hazard. He said even if the PBoC allows defaults at some banks, it will definitely ensure that depositors can withdraw their money from these banks to avoid “bank runs.”

Perpetual bonds

On January 17, the China Banking Insurance Regulatory Commission announced that it gave the Bank of China permission to issue up to 40 billion yuan of non-fixed-term bonds, or perpetual bonds, to replenish its capital. It was the first ever approval for a perpetual bond issue by a Chinese lender.

Alicia Garcia Herrero at Natixis Photo: Asia Times

It was a good news for Chinese banks as the PBoC can shop these “perps” while the lenders can enjoy cheap capital, said Alicia Garcia Herrero, managing director and chief economist in Asia Pacific, corporate and investment banking, Natixis.

On Monday, Natixis published three research reports about offshore and onshore bond markets and local government debts in China. It said provincial government risk generally increased last year with clear dispersion across the provinces. It also said the central government may place a higher priority on bailing out autonomous regions such as Guangxi, Inner Mongolia, Tibet, Xinjiang and Ningxia if there are any financial difficulties, as these regions are politically more unstable, having larger populations of minorities than other provinces.

Read: Baoshang Bank takeover an isolated case, PBoC says

Read: China banks under pressure after seizure of Baoshang Bank

Read: China’s Baoshang Bank taken over for 1 yr on ‘serious credit risks’