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Chinese provinces last year gave weak local banks a record 218.3 billion yuan ($31 billion) in special purpose bonds, a sign of concern about risks in one of the world’s most important financial systems. Injected capital.
Bond sales, which are used to increase regional financial institutions’ capital buffers, more than tripled in 2023 from a year earlier, according to data from Chinese financial data provider Wind.
The bonds will be sold by local governments and the proceeds can only be used to inject capital into banks, but not to facilitate the merger of weak financial institutions in China’s indebted regions, which are struggling to cope with the protracted real estate sector crisis. is also used. . The bond was introduced in 2020 to support banks through the coronavirus pandemic.
The accelerating flow of money into local banks underscores Chinese authorities’ concerns about the systemic importance of local banks as the economy slows.
Moody’s Investors Service analyst Yulia Wang said regional financial institutions, including urban and rural commercial banks, “hold 25% of China’s banking system assets,” adding that It added that exposure to such sectors increases risks to banks over the next 12 months. manufacturing, retail, real estate, construction, and municipal financing.
He said the risks are “significant for some regional banks, trust companies and asset managers.”
Regional financial institutions have been hit harder than larger institutions by cuts in interest rates and deposit rates aimed at supporting sluggish economic growth.
Lower interest rates generally reduce banks’ profits by narrowing the gap between what they pay for deposits and what they charge for loans.
“Last year, the net interest margin of small and medium-sized banks declined significantly, which significantly reduced their ability to replenish capital,” said Ming Ming, chief economist at CITIC Securities.
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The net interest margin of listed city commercial banks was at a historically low level of 1.6% as of the end of September.
“When interest rates fall, banks typically increase loan amounts to increase profits. However, amid weak demand and fierce competition among banks for prime customers, regional financial institutions’ profit margins are further squeezed. ,” Min said.
Since 2020, the largest issuers of special purpose bonds sold totaling RMB 476 billion have been Northeastern Liaoning Province and Central Henan Province.
Liaoning province has been working for years to merge three troubled banks, while Henan province is grappling with the fallout from a local banking scandal that wiped out some 40 billion yuan in savings.
The acceleration in special bond sales coincides with a sharp increase in the number of local bank mergers. More than 20 so-called village banks serving mainly farmers in central Sichuan, western Xinjiang and northern Hebei provinces will merge into larger banks in 2023, according to a regulatory filing by the State Financial Supervisory Administration. Or will be absorbed.
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China has a nationwide network of more than 4,000 banks, but concerns about the health of the banks have grown since relatively unknown Baoshang Bank was forced into a state takeover in 2021.
Regulators have become more vocal about the need for sector-wide consolidation, pushing for capital injections into struggling regional financial institutions and state stock buybacks.
The central bank also created a separate Financial Stability Fund to provide emergency liquidity to limit contagion risks in the event weak banks fail. But analysts have warned that the fund, which raised RMB64.6 billion in its first tranche in 2022, may be too weak to be an adequate safety net.
“Bond sales have helped regional banks supplement their capital, but their fragile capital situation has not fundamentally changed,” Moody’s Wang said.
He added that sales of special bonds will account for only about 0.9% of regional banks’ risk-weighted assets as of the end of 2022.