The fear is that big Chinese banks will be conscripted into national service again and again
Hengfeng Bank, an embattled Chinese lender, requires a thick skin these days. On August 30th the bank’s Communist Party committee summoned its members, including top executives, 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.
Officials have portrayed these troubled banks as peripheral to the economy. The assets of Hengfeng, the biggest, peaked in 2017 at 1.4trn yuan , just 0.5% of the total for Chinese banks. Regulators have also been prompt in fixing holes. When the Baoshang rescue spooked investors as the first instance of losses on interbank loans, the central bank quickly calmed them by injecting cash into the banking system.
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 lenders, so it should be possible to mop up their messes. To get a sense of the scale, Jason Bedford ofassessed capital levels, bad loans and loss provisions at a large sample of banks. He estimated that banks with total assets of 9.
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 reckoning, potentially for a long time. When defaults spread to brokerages in June, regulators brought them and their creditors, mostly banks, together in emergency meetings.
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