Chinese banks face the brunt of economic crisis

China’s smallest banks are languishing as they face the brunt of economic crisis Until recently few of the Chinese banks have either collapsed or have merged with others. The recent insolvency of Jiangxi Bank, which is a local bank has made the middle class Chinese suffer under the CCP.

Moreover, during the end of June, 40 Chinese banks vanished as they were absorbed into bigger ones. China’s regulators have been trudging through various reforms and consolidations for years.

Since 2019 several mid-tier banks have collapsed. Powerful investment managers and state financiers have melted down. But it is small, rural banks that provide the most complex problem.

Data has indicated 3,800 such institutions map the Chinese countryside. They have 55 trn yuan ($7.5 trn) in assets, which makes upto 13 per cent  of the total banking system and have long been mismanaged, accruing vast amounts of bad loans.

Many have lent to real-estate developers and local governments, gaining exposure to China’s property crisis. In recent years some have revealed that 40 per cent  of their books are made up of non-performing loans.

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The fiasco is getting messier with time. Many banks were established in order to serve small businesses, especially in China’s poorest areas. Those who are stuck in toxic debt trap cycle and struggling to supply firms with new loans are exacerbating the condition of vulnerable companies and hurting the local economic growth.

The worst-performing small banks have already threatened social stability. Fraud on a large scale caused several to freeze withdrawals in 2022, drawing depositors onto the streets of a provincial capital.

One solution has been steady but meagre recapitalisation. Local governments are issuing special-purpose bonds, which they use for a number of things including bailing out banks.

It has been observed that between December 2020 and May this year, Liaoning in China’s north-east injected 17 per cent of special-purpose-bond proceeds into its banks. Liaoning is also at the centre of what has now become China’s main way of dealing with small, feeble banks: making them disappear.

Of the 40 institutions that vanished recently, 36 were in the province and absorbed into a new lender, called Liaoning Rural Commercial Bank. Since it was set up in September, five other institutions have been established to do similar work. More are expected.

This regulatory vanishing act will probably pick up pace. Supporters say that fewer bigger banks will be easier for regulators to keep watch over. Critics argue that it is little more than sleight of hand. Combining dozens of bad banks, they say, only creates bigger, badder banks.

Regulators are doubling down on consolidation because they lack mechanisms to allow banks to fail and leave the market. Draft legislation, called the Financial Stability Law, was proposed at a lawmaking session in Beijing in June but was once again delayed. Such incompetency is now common in Chinese policymaking.

As economic growth of China slows down further, it has been realised that China’s obsession to outshine everyone in its path is highly unrealistic, when they are struggling to handle the basic units of economy properly. The lowest rung of the banking system in China needs more than wave a wand at their problems.