MNI EXCLUSIVE: Virus Response May Prompt China Bank Bailouts

By Archie Zhang

     BEIJING (MNI) - Moves by China to ease lending standards to bolster the

economy during the coronavirus outbreak will prompt a spike in bad loans and

force the authorities to rescue more smaller banks from less developed regions

of the country later this year as downward pressure weighs on output, policy

advisors told MNI.

     "These measures to support small businesses will inevitably lead to a rise

in commercial banks' nonperforming loans over time," said Wang Jun, a member of

the academic committee under the China Center for International Economic

Exchange. Combined with already worsening economic conditions, such moves could

push banks in regions undergoing economic hardship to the brink, prompting

bailouts before 2020 is out, he said.

     Smaller regional banks were responsible for more than 40% of China's CNY2

trillion NPLs in 2019, with an average NPL ratio of 3.06% of total loans, 120

bps higher than the ratio for the system as a whole, according to MNI

calculations using data from the China Banking and Insurance Regulatory

Commission.

     With much of the economy still returning from a partial shutdown aimed at

limiting the spread of the virus, authorities are encouraging banks to cut

lending rates to small- and medium-sized companies by at least 50 bps versus the

average of the previous two years. Banks have also been asked to roll over loans

to small firms, while some local governments have promised to provide loan

guarantees. In addition, regulators have indicated they are prepared to permit

banks to operate with higher levels of NPLs.

     --BAD LOANS

     "The banking system disposed of about CNY2 trillion in bad loans last year

and this is a big amount. But bad loans are now growing too quickly for banks to

be able to handle them," said Dong Ximiao, an analyst with the National

Institute of Finance and Development.

     Dong predicted the banking regulator would speed up measures to address the

problems of struggling small banks this year, perhaps following similar

procedures to those used in the bailout of Bank of Baoshang, which was taken

over the People's Bank of China and the CBIRC in May, with its operations

transferred to state-owned China Construction Bank. In July, three state-owned

banks took shares in another failing lender, Bank of Jinzhou.

     Banks in China's northeast, where much heavy industry is in decline and

some cities are suffering from economic contraction, may be a particular focus

for authorities, Dong said.

     Banks could also sell bad loan packages to asset management companies, Dong

added.

     China's four big state-owned asset managers -- Huarong, China Orient, the

Great Wall, and Cinda --were set up in the 1990s as vehicles to help clean up

state-owned banks being prepared for stock market flotation. But Chinese

authorities are wary of accumulating more bad assets on the state's balance

sheet, which one policy advisor, who asked to remain anonymous, likened to

shifting eventual losses "from the left hand to the right hand," and are looking

to foreign asset managers to buy NPLs.

     --FOREIGN NPL PURCHASES

     Oaktree Capital last week became the first foreign company to register as a

distressed debt manager in China, media reported, after provisions allowing for

U.S. firms to buy Chinese bad loans were included in the Phase One trade deal

signed by Washington and Beijing.

     While foreign investors have expertise in loan recovery and salvaging

assets, they will probably need to work with domestic asset managers, which are

more qualified in identifying bad loans worth buying, another advisor said. Debt

recovery rates have historically been low in China, and bankruptcy laws remain

weak, despite a revision in 2019. Distressed asset investors may also have to

contend with local governments which may in some cases have to approve

restructurings of companies in which they have stakes, said another advisor, who

worked with the central government on the bankruptcy law.

     Another way to boost smaller banks' ability to deal with risks might be

cross-regional consolidation, but Wang noted that local governments might often

be reluctant to allow dilution of their controlling stakes.

--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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