The Economist November 13th 2021 73
Finance & economicsChinesebanksAttack on the tycoons
I
t’s been abad year to be a big cheese in
China. Billionaire entrepreneurs have
been hounded. Over-extravagant enter-
tainers have disappeared from the inter-
net. Now a new type of tycoon is feeling the
heat. The latest regulatory crackdown on
what the government considers private-
sector misbehaviour extends to business-
men with excessively cosy ties to banks.
The fear is that insider dealing, preferen-
tial access to credit and lax corporate go-
vernance pose threats to stability, particu-
larly in the regional and local underbelly of
China’s financial system.
The most prominent red flag is Ever-
grande, a debt-ridden property firm close
to collapse that until recently had a 36%
stake in Shengjing Bank, a local lender
based in the north-eastern province of
Liaoning. The authorities are said to be in-
vestigating whether Evergrande, which is
run by a billionaire, Hui Ka Yan, took con-
trol of Shengjing, with about 1trn yuan
($156bn) in assets, using illicit means, as
well as conducting some 100bn yuan in re-
lated-party transactions.
Another notorious case involves hna
Group, an acquisitive conglomerate which
took over Yingkou Coastal Bank in Liao-ning in 2014 (see chart 1 on next page). hna
put new leaders into the bank and trans-
formed it into a mill for shadow-banking
products that provided it and related
groups with copious amounts of credit. Its
assets tripled in 2016, making it the fastest-
growing bank in China that year—before it
almost collapsed. Since February hnahas
been in bankruptcy administration. Chen
Feng, its co-founder and chairman, was ar-
rested in September, as was its ceo.
The malaise goes far deeper, posing a
potential threat to economic stability in
some Chinese provinces, particularly rust-
belt ones like Liaoning. The 134 metropoli-
tan and 1,400-odd rural commercial banks
in China make up about 32% of its com-
mercial-banking sector, with some 90trnyuan, or $14trn, in total assets. That is al-
most the size of Britain’s entire banking
system. They exist in the shadow of Chi-
na’s six big national-level banks and 12
joint-stock banks, which are predomi-
nantly state-owned and have the most vis-
ibility. Unlike the bigger banks, during
most of the past decade many of those in
the lower tiers have sold ownership stakes
to large private investors, to the point of
being under the influence of them. In re-
cent years some have become cesspools of
bad debts, insider dealing and failures of
risk management, which are often attrib-
uted to misaligned ownership incentives.
This has aroused the concern of regula-
tors. The central government is expediting
a reform to push out what it calls “problem
shareholders” from banks. On October 15th
the China Banking and Insurance Regula-
tory Commission introduced rules that ex-
tended supervision of those that it consi-
dered to be banks’ controlling share-
holders. According to China Daily, a gov-
ernment mouthpiece, that extended to
anyone holding a 10% stake or more in a ci-
ty or local bank, or those holding the larg-
est equity stake in a bank or insurance
company, with ownership of no less than
5%. The aim is to weed out over-cosy cor-
porate interests.
If corporate shareholders are indeed
the problem, the authorities will have their
hands full. The Economistcalculates that of
107 city commercial banks that disclosed
financial information for 2020, 72 with
about 20.2trn yuan in total assets had large
corporate shareholders, many of which
were property developers and manufactur-H ONG KONG
The government sets its sights on sleazy ties between businesses and banks→Alsointhissection
75 Venturecapital’scryptocraze
75 America’sinflationshock
76 Debt-for-natureswaps
77 Buttonwood:Theappealofcash
78 Free exchange: Lessons from Zillow