The Economist - USA (2021-11-13)

74 Finance&economics TheEconomistNovember13th 2021

ers.Twenty­twoofthisgroupwerecon­

trolledoutrightby corporations and ty­

coons,orhadbeenuntiltheywererecently

forcedtorestructure.Buteventhosewith

morethanonelargeshareholderhaveat­

tractedtheattentionofregulators.Theau­

thoritiesarelikelytobescrutinisingthe

wayinvestorscompetewitheachotherfor

preferentialtreatment.

Thelevelofcorporateownershipatru­

ralcommercialbanksextends evenfur­

ther—tothepointthatit hasshockedsome

researchers. Wang Chunyang of Peking

Universitysurveyed1,295ruralbanksand

foundthat1,122,orabout87%ofthem,had

privatecompaniesastheirlargestshare­

holders.Byourcalculations,thatlevelof

private ownership implies that up to

39.4trnyuaninrural­bankingassetscould

becontrolledorinfluencedbyprivatein­

terests.Forthesebanks,identifyingpro­

blemsearlyisa challenge.Smallerlenders

aremorelikelytohidetheirbaddebts,says

Ruan Tianyueof NationalUniversity of

Singapore,creatinga regulatoryblindspot.

Privateownershipofbanks,byitself,is

notthecauseoftheproblem.Somepri­

vatelyheldbanks,suchasthenewlycreat­

edZhongbangBank,haveperformedwell.

Fortheirpart,manysmall,government­

controlled lenders have demonstrated

abysmalriskcontrols.Butinbankslacking

incorporategovernance,theriskisthatthe

ownersusetheirclouttoextractloanson

preferentialterms,underminingprudent

riskmanagementandincreasingthelevel

ofbaddebts.

Thatcouldhaveeconomicconsequenc­

es.SomeexpertslikenthestateofChina’s

smallbankstothatofthemorethan1,000

savings­and­loan institutions that col­

lapsedinAmericainthemid­1980sdueto

deregulation and lax lending controls.

Theysaybad­debtproblems amongcity

andruralbankscouldhurtregionaleco­

nomicgrowth.

Another problemismorepoliticalin

nature.Asevidencegrowsoftycoons’mur­

kyrelationshipswithbanks,themoreit

plays into thenarrative ofPresident Xi

Jinpingthatsocialistcommand­and­con­

trolpoliciesdoabetter jobthanprivate

capitalinallocatingeconomicresources.

Signs of misbehaviour appear to be

mushrooming.BesidesEvergrande,which

hasbeenforcedtosellsomeofitssharesin

Shengjing,HongKong­listedBankofGan­

surequireda bail­outlastyearafteritlent

toandinvestedheavilyinthedebtsecuri­

tiesofoneofitsshareholders,whicheven­

tuallydefaulted.BankofJinzhou,a north­

easternlender,requiredanemergencyre­

structuringafteritslargestshareholder,to

whichithadextendedmanyloans,could

nolongerpaybackcreditors.AnbangIn­

surance,theunwieldyconglomeratebest

knownoutsideChinaforbuyingtheWal­

dorfHotelin2014,controlledChengduRu­

ralCommercialBankuntil2020.XiaoJian­

hua,a tycoonwhowaskidnappedbyChi­

neseagentsfromaHong Konghotelin

2017, controlled two lenders, Baoshang

BankandBankofHarbin,bothofwhichre­

quiredexpensivestatebail­outs.

Theseproblemsareunlikelytoabateas

China’s economy decelerates and more

companiesdefault.InSeptembersharesin

FuxinBankwereputupforsaleinanon­

lineauctionmeanttohelpraisecapitalfor

thestrugglinglenderaftera propertyde­

veloperwithsharesinthecompanycould

nolongerrepayitsdebts.BankofLangfang

facesa potentialincreaseinbaddebtsafter

itssecond­largestshareholder,ChinaFor­

tune Land, a developer, defaulted on a

5.3bnyuanbondearlierthisyear.

Regulatorstakeseveralapproachesto­

wardsweedingoutmiscreantowners—of

varyingseverity.Oneistopushoutproble­

maticshareholders.Inmid­2020thebank­

ingregulatorpublisheda listof 38 “illegal

shareholders”thatithadforcedtodivest.

Another is detention. Mr Xiao, for in­

stance,isthoughttobecurrentlyheldin

Shanghai,whereheisassistingintheun­

windingofhisbusinessoperations.A third

isthedeathsentence.CaiGuohua,former

chairman of Hengfeng Bank, which re­

quiredabail­outin2020,washandeda

suspendeddeathsentencefor,amongoth­

erthings,takingillegalloans.

Authoritieshavenointentionofforc­

ing all private shareholders out of the

banks,buttheyaremovingtoensurethat

thelargest shareholders come fromthe

state,saysLianPingofBankofCommuni­

cations,a large Chinesebank.Thiswill

meananupheavalacrosstheindustry,giv­

en how prevalent large, private share­

holdershavebecomeinrecentyears.Such

regulatoryactionswilltaketimeandwill

needtoavoidunderminingdepositorcon­

fidenceatbanks.

Insomeregions,suchasthenorth­east,

thegovernmenthassoughttorestructure

handfulsofbanksata time,possiblywor­

riedabouta regionalconcentrationofdebt

woes.s&p Global,aratingsagency,says

thatnearly8%oftheloanbooksofthe

mostprominentcityandrurallendersin

thenorth­eastwerenon­performingorof

questionable status in 2020. The figure

wasjust3%fortheloanbooksofsimilar

banksineasternChina(seechart2).

Thenorth­easthasoneofthehighest

ratesofprivateownershipinthecountry.

InLiaoningprovince,forexample,eightof

its 15 citycommercialbanksareprivately

controlled.Thatproduceda driveforcon­

solidation.Afterthehnadebacle,Yingkou

CoastalBankbecamethecentralpillarof

anefforttomergebanksinLiaoning.At

firstregulatorswentsofarastoattemptto

bringtogether 12 ofLiaoning’sbanks.But

laterthisambitionwasdownsizedtotwo,

includingYingkou.

For all the regulatory overdrive, the

neatestsolutioncontinuestoevadeChi­

neseregulators:allowingbankstofailand

exitthemarket.Notsincethecollapseof

HainanDevelopmentBankin 1998 hasa

lenderbeenallowedtofail.Andthatwasa

convolutedbankruptcythatstilldragson

tothisday.Ruralbankswouldbefertile

groundforsuchtests.n

Piggy banks

China, ownership structure of tycoon banks

October 2021, % of total

Source:QCC *ListedinHongKong †201

1

FuxinBank

LangfangBank

ChengduRural

CommercialBank†

YingkouCoastalBank

ShengjingBank*

100806040200

Localgovernment Otherprivate groups

Private conglomerates Property developers

Evergrande

HNA Hotels

Anbang

Insurance

China Fortune Land

Rot in the rust belt

Chinese banks*

Source:S&PGlobalRatings

*Includestop 30 unlistedand 28 listedruralandcitybanks across all regions

†Loansflaggedforpotentialrepayment problems

2

Eastern

South-western

Megabanks

Joint-stockbanks

Northern

South-central

North-western

North-eastern

86420

Non-performingandspecial-mentionloans,

as%oftotalloans,end-2020

Non-performing Special-mention†

North-eastern

North-western

South-central

Northern

Joint-stockbanks

Megabanks

South-western

Eastern

0 50 100 150

Loan-loss reserves, as % of total

non-performing and special-mention loans

201 2020