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Regulators In China Put Rural Lenders And City-Level Banks On Notice Following A State Takeover

Ali Raza
Author: Ali Raza

Last Updated: March 6, 2020
China stock market

Many people in China’s financial industry may not know, but credit risks exist for operators of small & medium lending. As the regulators prepare to monitor their operations closely, all these risks will surface. Right now, some rural co-operatives and city banks whose credit quality is low have received a notice from China regulators. This is following the state takeover last week of Baoshang Bank. The regulators have decided to scrutinize the activities of the financial system and stop many of their unprofitable dealings.

The State Takes Over Baoshang Bank

On Friday, the People’s Bank Of China & the China Banking and Regulatory Commission took over Baoshang. This is making it the first time since 1998 that such an incident is taking place. The intent of the takeover is to enable the regulators to operate the wheels for one year. However, the report we got showed that the China Construction Bank would underwrite the financial operations. CCB is not a state lender, and its nationalization is the first since 1998.

According to a university professor, the implication is that the Baoshang had deeper problems which local authorities could not solve. Maybe that’s the reason for using CCB. He went further to state that the bank shows that small & medium banks are facing serious credit risks.

The City-Level Banks has Many Non-Performing Loans

Many people may frown at the takeover, but the regulators had a reason to act the way they did. City-Level banks have many non-performing loans. These banks and even the commercial banks in the rural areas recorded many bad loans. This state of affairs in the financial sector indirectly affects the economy.

Another reason for the concern is that the mid-size and small banks have been growing very fast. They’ve been doubling their share of the banking assets. However, bad practices have affected them and led to the accumulation of many credit risks. According to Sun, some of these banks were serving as a means to solve financial needs for the owners. Well, we expect to see more of these reasons once the regulators take over.

Insight into the Baoshang Bank

The bank started operating in 1998. It has up to 14 branches in Mongolia plus four branches in Shenzhen, Beijing, Ningbo, and Chengdu. One of the biggest financiers in China, Xiao Jianhua, started buying shares of the bank since 2000. Right now, Xiao owns above 70% of Baoshang Bank.

There are suspicions that maybe the financier used the bank as his piggy bank. An analyst, Chen Shujin, has discovered that 26% of the bank’s lending went to 10 of their best clients. The bank is paying for it because the Baoshang outstanding loans increased from 65% to 156% billion Yuan. Its non-performing loans were 1.68% according to the new filing. Maybe, once the regulators start running it, most of the underhand practices will stop.

Check our posts about challenger banks here.

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Ali Raza

A journalist, with experience in web journalism and marketing. Ali holds a master degree in finance and enjoys writing about cryptocurrencies and fintech. Ali’s work has been published on a number of cryptocurrency publications.