MNI (CORRECTED): China Targets Debt Risks With Stability Fund

(Corrects article first published on March 15, removing reference to "millions of yuan" in paragraph eight.)

China is determined to get ahead of the curve on risks from the banking sector through a Financial Stability Guarantee Fund to defuse any potential domestic and overseas challenges to market stability, former People’s Bank of China officials and now industry executives told MNI.

A fund for ensuring financial stability was mentioned by Premier Li Keqiang last week at the National Policy Conference, with details sparse. But the broad outline is tool to rescue troubled financial institutions and to reduce dependence on the PBOC as “a lender of last resort,” said Xu Nuojin, former head of PBOC’s Zhengzhou branch and a deputy of the NPC.

Li’s work report was the first time the government mentioned the fund at an NPC venue, indicating preventing risk is now high on the agenda, Xu said, see: MNI: PBOC Seen Cutting Deposit Cost As It Pushes Banks To Lend.

The fund is likely to be led and managed by the government with a focus on local financial institutions suffering potential risks, which is a systemic guarantee fund, Xu noted.

Xu added that the idea could draw on existing domestic and overseas funds such as China’s Deposit Insurance Fund, China’s Insurance Security Fund and the European Financial Stability Facility.

HIGH RISK

About 7%, or 316 of 4,398 banks in China, were listed as high-risk banks by the end of 2021, according to the PBOC but their assets are 1.04% of the overall banking sector.

The central bank said the number of high-risk banks should be cut to 200 by the end of 2025.

The funding for cleaning up the high-risk banks would partly come from fiscal authorities, according to a central bank advisor who declined to be named, adding that strategies could help recapitilisation or provide fresh liquidity to the indebted lenders.

Li said in his report that “local governments must fulfill their responsibilities” and “all these efforts will ensure that no systemic risks arise.”

In addition, the government will “further reform the equity structures and corporate governance of small and medium banks” and “move faster to deal with non-performing assets,” Li said.

SMALL BANKS

Some small and medium-sized banks with high levels of bad debts were hit by unexpected domestic and external events as well as corruption that challenged financial stability, according to a note from the Bank of China.

Xu, now head of Zhongyuan Bank created in 2014 with the merger of 13 smaller banks in Henan province, pointed out that risks accumulated in the process of business expansion by small banks in the previous years have started to show up in an “era of meager profits” of banking sector.

Recapitalisation is an urgent need of small lenders, Xu said, pointing out the traditional way of using profitability as a guide to recapitalise small banks is less viable in reducing off-balance-sheet businesses and the need to get the lenders to support small businesses.

The banker called on regulators to accelerate approvals for initial public offerings of the qualified small- and medium-sized banks and use funds raised from local government special bonds to recapitalise them.

BIG BANKS

Wang Jingwu, vice president and chief risk officer of Industrial and Commercial Bank of China and a deputy of the NPC, said his bank will hit a balance between increased support to small business and risk prevention.

Wang, also former official at the PBOC, said ICBC has closely monitored the use of loans to small businesses via big data and internet technology and built up a special information platform to serve them.