The Economist UK - 07.09.2019

(Grace) #1
The EconomistSeptember 7th 2019 Finance & economics 65

2


W

orking atHengfeng Bank, an em-
battled Chinese lender, requires a
thick skin these days. On August 30th the
bank’s Communist Party committee sum-
moned its members, including top execu-
tives, for a self-criticism session, of the sort
common in the Maoist era. “No one talked
about their achievements. They talked only
of their shortcomings and problems. They
pointed the knife blade at themselves,” the
bank reported afterwards. “Blushing and
sweating, they expelled their poison.”
The revival of self-criticism under Xi
Jinping, China’s president, has raised
alarm about the direction in which he is
steering the country. Other banks have also
conducted similar sessions, a testament to
Mr Xi’s assertion of party control over the
economy. But in the case of Hengfeng, rav-
aged by corruption scandals and bailed out
last month by the government, the sight of
its employees examining their misdeeds
was, in a way, reassuring. It suggests that
officials are getting a handle on one of the
worst actors in the banking system, even if
their techniques sometimes owe more to
Lenin than to Dodd or Frank.
The question now is how many more
Hengfengs there are. It was the third bank
to be rescued in the space of three months.
In May regulators took over Baoshang Bank
in Inner Mongolia. In July Industrial and
Commercial Bank of China (icbc), a state-
owned giant, propped up the Bank of Jin-
zhou in the north-east. Then in August
Hengfeng, based in Shandong province, re-
ceived a cash infusion from China’s sover-
eign-wealth fund.
Officials have portrayed these troubled
banks as peripheral to the economy. The
assets of Hengfeng, the biggest, peaked in
2017 at 1.4trn yuan ($210bn at the time), just

0.5% of the total for Chinese banks. Regula-
tors have also been prompt in fixing holes.
When the Baoshang rescue spooked inves-
tors as the first instance of losses on inter-
bank loans, the central bank quickly
calmed them by injecting cash into the
banking system.
Nevertheless, many financiers suspect
that the rot is deeper. Their nerviness is vis-
ible in two ways. The first is small banks’ el-
evated funding costs. For years they paid
roughly the same interest rates as big
banks to borrow from each other. Since
Baoshang’s rescue, their costs have been
half a percentage point higher (see chart).
The second is the 10% fall in icbc’s
shares since its Jinzhou investment, a per-
formance that has fallen short of other
banks. An auditor who worked with icbc
says the bank was surprised by the blow-
back. It had used a subsidiary to support
Jinzhou, hoping to quarantine the rest of
its balance-sheet. But investors did not see
it that way. As analysts with China Mer-

chants Bank said, it looked as if icbcwas
performing “national service”. The fear is
that big banks will be conscripted into ser-
vice again and again.
Many more banks do indeed need help.
By the central bank’s count, 420 of China’s
4,327 lenders are at high risk of distress.
However, all but nine are puny rural lend-
ers, so it should be possible to mop up their
messes. To get a sense of the scale, Jason
Bedford of ubs assessed capital levels, bad
loans and loss provisions at a large sample
of banks. He estimated that banks with to-
tal assets of 9.2trn yuan ($1.3trn) are in dan-
ger, amounting to about 4% of the com-
mercial banking system, or nearly a tenth
of gdp. That is a big problem, but not an in-
superable one.
The banks rescued in recent months
were atypical in various ways. Baoshang
was the piggy bank of a disgraced tycoon;
Bank of Jinzhou’s auditors resigned amid
signs of loan fraud; multiple executives at
Hengfeng were felled by corruption char-
ges. “There doesn’t appear to be other
banks left with the same scale and toxicity
as these three,” says Mr Bedford.
Yet much about them was also normal.
China’s smaller banks have been especially
aggressive, increasing their assets by 144%
over the past five years, compared with 53%
for large banks. They have also relied more
on interbank borrowing. The implication
is that as the economy slows, and as big
banks grow wary of counterparty risk,
more small banks will be exposed.
Charlene Chu of Autonomous Research
has long estimated that bad loans in China
are much higher than reported: more like
20% of bank assets rather than the official
2%. She thinks this year’s turbulence is a
preview of what lies ahead. But she also
says that China has ways to delay the reck-
oning, potentially for a long time. When
defaults spread to brokerages in June, regu-
lators brought them and their creditors,
mostly banks, together in emergency
meetings. “It is a rare tool that Chinese au-
thorities have,” says Ms Chu. “They called
in all parties, and said no one is defaulting
any more.”
Even if China can prevent widespread
defaults, its banks’ newfound risk aversion
poses dangers itself. Small banks had been
big lenders to small companies, which in
turn are big drivers of growth. Now, the
outlook for all is more subdued.
At Hengfeng it is no coincidence that,
when not engaged in self-criticism, bank-
ers are talking up their role in helping
small firms. In a recent news broadcast,
Hengfeng’s chairwoman was shown visit-
ing a local food company. She gazed over a
rice field, trimmed to look like Tiananmen,
complete with a portrait of Mao. A slogan
was cut into the field: “I love my mother-
land”. In banking as in farming, it is good to
know which way the wind is blowing. 7

SHANGHAI
After three banks are rescued, how many more are at risk?

China’s financial system

Expelling the poison


Struggle session

Source: Wind Info *Urban commercial banks

China, issue interest rate of three-month
negotiable certificate of deposit (NCD), %

2017 18 19

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Large banks

Smaller banks*

Emmanuel Alvarez Agis, another adviser
who served under Néstor Kirchner, Ms Fer-
nández’s late husband and predecessor as
president. “The future depends on build-
ing coalitions, for change, not governing
just from one side or the other,” he has said.
Mr Nielsen says the next government
will negotiate with the imf, rather than
walk away from it. Having already bor-
rowed almost 80% of the $57bn on offer,
Argentina will need new loans from the
fund to help it repay the old ones. Mr Niel-
sen has also described China as a potential
“financial life jacket”. Ms Fernández, who

has remained remarkably quiet during the
campaign, is known to covet Chinese in-
vestment, which might be attracted to Ar-
gentina’s infrastructure, 5gnetworks and
renewable-energy projects.
If that is the extent of Ms Fernández’s
influence on the next government, foreign
investors will be relieved. And so will some
Argentines. “Many of us could never vote
for Cristina and Alberto Fernández,” says a
retired woman, waiting at her bank this
week to change pesos into dollars. “But
who can trust any of our politicians after all
this?...I trust only my purse.” 7
Free download pdf