Troubled banks in China are struggling to raise funds as concerns over the health of the financial system grow and confidence in state-led bailouts falters.
China’s banking system is facing its greatest challenge in nearly 20 years after years of runaway growth and mounting bad debt levels, which have topped 40 per cent of loans at some small lenders.
The government has had to intervene in the operations of three local banks this year, starting with the takeover of Baoshang Bank in May, marking the first instance of a direct state takeover of a lender in two decades.
Partial bailouts at two more lenders, Bank of Jinzhou and Hengfeng Bank, were also carried out this year with the hopes of calming nerves in the interbank market and avoiding a liquidity crisis for troubled banks that are heavily reliant on borrowing from the market.
Despite those efforts, many banks are facing deteriorating funding conditions.
Troubled banks have been able to secure only 20-40 per cent of the funds they have sought to raise in the interbank market for negotiable certificates of deposit since the takeover of Baoshang Bank, according to research from UBS.
“They clearly have some liquidity issues,” said May Yan, UBS’s head of greater China financials equity research.
Some of China’s weakest banks have been forced to offer up the country’s highest yields on investment products, in a sign of desperation to raise funds.
Bank of Jinzhou, which received a partial bailout from ICBC in July, offers investors a 4.83 per cent return on wealth management products it sells, the highest rate in the country, according to data compiled by Rong360, an online financial services group.
Bank of Dandong, which was hit by US sanctions for links to North Korea in 2017, will pay 4.43 per cent on wealth management products.
Bank of Dalian, which has been bailed out twice since 2015, offers up 4.29 per cent on investment products, putting it among the top 10 highest offerings on bank investment products.
“This means investors do not fully trust the government interventions,” said Alicia García-Herrero, chief Asia-Pacific economist at Natixis. “The market is saying there are serious doubts about these banks.”
Funding from wealth management products does not bolster banks’ balance sheets but has become an important source of income.
China’s central bank warned this week that about 13 per cent of lenders in the country, or 586 institutions, presented a “high risk”.
Many of those risky banks, according to an annual report on the financial system from the People’s Bank of China, are concentrated in rural areas.
The funding constraints will probably increase the level of risk smaller banks are forced to take in order to pay back depositors and investors, analysts said.
“The key risk of offering higher wealth management product rates is that banks may match these funds by investing in riskier assets,” said Harry Hu, a senior director at S&P Global Ratings.