China’s indebted local governments splash out billions to save struggling small banks
Poor liquidity at China’s regional banks could trigger instability in the state-owned financial system, reduce the credit supply for the real economy, and potentially spill over to a wide range of industriesLast year, the People’s Bank of China identified 366 ‘high-risk’ financial institutions across the countryBanking & financeAmanda LeePublished: 10:00am, 30 Sep, 2023Why you can trust SCMP
China’s local governments are spending billions – and amassing more debt – to recapitalise the nation’s cash-strapped small banks amid growing default risks facing many regional economies.
American credit rating agency Standard & Poor’s Global Ratings estimated that local governments in China have borrowed a total of 152.3 billion yuan (US$21 billion) so far this year to replenish the balance sheets of small banks in China’s financially weaker regions of Liaoning, Gansu, Inner Mongolia, Henan and Heilongjiang. In 2022, the borrowing totaled 63 billion yuan, the agency said.
China’s regulators have stepped up their supervision of the country’s small lenders over the past few years. The sector, which is supposed to support county- and rural-level economies, has been plagued by poor governance, fraud and weak balance sheets.
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Last year, the People’s Bank of China (PBOC) identified 366 “high-risk” financial institutions, including city commercial banks and rural commercial banks, as well as village banks. Poor liquidity at regional banks in China could trigger instability in the state-owned financial system, reduce the credit supply for the real economy, and potentially spill over to a wide range of industries.