Banks disappear as China tightens measures on small and medium-sized banks

 TheBL Staff 02/18/22

China's central bank cuts reserve requirement ratio for small, mid-sized banks on Apr 3, 2020.(CGTN/Screenshot via TheBL/Youtube)

According to Caijing magazine, more than 20 banks “disappeared” in China last year. In addition, the article shows that since 2020, more than 20 small and medium-sized banks have been in the process of mergers and restructuring.

Ninety-two bank shares are for sale between February and now, but 60% of them remain unsold. As a result, unsold auctions have become a regular event in China National’s present banking stock auction market.

Zhou Maohua, an analyst at the Financial Markets Department of Everbright Bank of China, believes in three main reasons for the bank’s share auction failure. The most important is related to the operating conditions and prospects of the bank itself. Due to the influence of the economic cycle, external shocks, and fierce market competition, small and medium-sized banks are under tremendous operating pressure. 

They have problems such as low asset quality and a low level of operation. 

In addition, small and medium-sized banks in Liaoning, Shanxi, Sichuan, and other provinces have also started consolidation and restructuring. 

On Sept. 29, 2021, the China Banking and Insurance Regulatory Commission agreed that Liaoshen Bank (provincial city commercial bank) would merge with Yingkou Coastal Bank and Liaoyang Bank. According to the Liaoning local authorities plan, in the future, it will consolidate ten other city commercial banks, such as Huludao Bank, Fuxin Bank, Fushun Bank.

According to Chinese-language media Da Ji Yuan, some merged units have defaulted in the recent wave of small and medium-sized banks’ mergers. Nevertheless, mergers and restructuring have become one of the most efficient ways for small and medium-sized banks with high risks.

The report said that the wave of small and medium-sized bank mergers would continue into 2022.

In May 2020, the Financial Stability and Development Committee of the State Council of China announced that it planned to release 11 significant financial reform measures, including deepening the reform of small and medium-sized banks. The merger and restructuring of small and medium-sized banks is a vital implementation measure.

There are many small and medium-sized banks in China, currently about 4,000, with total assets accounting for about 28% of the entire banking system. The development of such financial institutions is closely related to the economies of various regions.

In recent years, the regulatory authorities have further clarified the development direction of small and medium-sized banks. Small and medium-sized banks and regional banks need to develop locally and cannot carry out business nationwide. Moreover, they tend to focus on small and micro enterprises and “agriculture, rural areas and farmers” and personal financial services to meet the needs of local businesses and the financial needs of residents.

However, as policies support the development of inclusive finance business, large state-owned banks continue to sink with low-interest-rate loans, which has had a significant impact on the business of small and medium-sized banks. As a result, small and medium-sized banks are at a disadvantage in the capital, customers, payment systems, cross-industry, and IT teams.

Under the squeeze of large banks, how small and medium-sized banks use digitalization to make features is a dilemma, but the positioning of such banks to serve residents’ local SMEs can not be messed up. Small and medium-sized banks should not countenance large accounts, which could be fatal if they step on a single burst project. Restricting the business of small and medium-sized banks to the local area and encouraging them to do small and micro customers is a kind of protection.

China has 134 metropolitan and about 1,400 rural commercial banks. This figure accounts for about 32% of its commercial-banking sector, with total assets of $14 billion. That is nearly as big as Britain’s entire banking system. They exist in the shadow of six central national-level banks and 12 joint-stock banks, which are mainly state-owned and have the most public exposure.

Unlike the larger banks, those in the lower tiers have sold ownership stakes to major private investors. As a result, those investors have considerably influenced small banks. As a result, some banks turned out to be cesspools of bad debts, risk management failures, and insider dealing during the last decade.

The rate of private ownership in the northeast is among the highest in the country. Eight of Liaoning province’s 15 city commercial banks, for example, are privately owned. Consequently, there was a push for consolidation. Following the HNA crisis, Yingkou Coastal Bank became the focal point of a Liaoning-wide drive to consolidate banks. Regulators went so far as to initially try to merge 12 of Liaoning’s banks. However, this objective was eventually reduced to two, which included Yingkou.