MNI EXCLUSIVE: China Regional Banks Need Capital, Or Bailouts

     BEIJING (MNI) - The Chinese government is trying to determine the extent of

a capital shortfall in the country's regional banks, two sources close to the

regulator told MNI, with policy advisors saying they expected a jump in the

number of official bailouts of lenders as the coronavirus outbreak puts strain

on smaller- and medium-sized business borrowers.

     About 10-20% of the more than 4,000 regional banks currently lack

sufficient capital, one of the sources said, noting that some of this might be

covered by issuance of perpetual bonds. A second source said the shortfall could

be "relatively big," but added that the regulator "currently wants ailing banks

to "solve the problem by themselves."

     Commercial banks in China have raised CNY1.68 trillion in fresh capital

since 2019, mainly via bond sales, data from Eastmoney shows. That could

increase this year under pressure from the regulator.

     Even before coronavirus brought much of the economy to a halt earlier this

year, some regional lenders had been struggling. In 2019, authorities injected

more than CNY181 billion into Bank of Jinzhou and Hengfeng Bank, while the cost

to the People's Bank of China of bailing out Bank of Baoshang bailout remains

unclear.

     Wang Jun, a member of the academic committee of the China Center for

International Economic Exchange, said more banks will be taken over by the

central government this year, with the number continuing to rise into the

future.

     --CONSOLIDATION TO BOOST EFFICIENCY

     "Some regional banks will go out of business, and the consolidation in the

banking system could actually increase the efficiency in allocating resources,"

said Wang, also chief economist at the Bank of Zhongyuan.

     Any consolidation will see a heavy degree of central coordination, Wang

said, noting that with banking licenses seen as valuable commodities, there is

little chance of local governments allowing them to fall into the hands of

outsiders.

     The image of regional banks has been tarnished after failures left

depositors with losses. In order to retain customers, some banks might need

regulators to allow them to raise their interest rates in the tightly-regulated

deposit market, as well as allow them to employ more technology to offer new

services, said Dong Ximiao, an analyst with the National Institution of Finance

and Development. Like Wang, Dong expected an increasing number of bailouts.

     Just as pressure builds to push up the cost of their deposit funding costs

on the liability side of their balance sheet, falling government bond yields and

lower interbank rates following PBOC liquidity injections have also depressed

returns on the asset side for regional banks.

     The latest regional lender to need assistance is Hong-Kong-listed Bank of

Gansu, from north-western China. Its shares fell 40% on April 1 after profits

fell 85% and its non-performing loan ratio hit 2.45%, above the regulatory

maximum 2%.

     The bank agreed to lend CNY30 billion yuan to state firms over three years,

after reports of an injection of funds by the Gansu provincial government.

Depositors had rushed to the one of the bank's branches to withdraw funds,

despite virus risks, MNI understands. The local government put out a statement

on its website last week describing the bank as the only provincially-controlled

bank in Gansu to get official support.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: archie.zhang@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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