In China, regional authorities have issued a record number of special bonds to provide support to small banks that are facing problems.
In this case, in the mentioned country, measures are being taken at the municipal level to prevent risks that have the scale of a systemic trend and exist against the background of a crisis situation in the real estate sector, which turned out to be longer than expected.
Since the beginning of this year, at least 15 provinces in China have issued special bonds for small and medium-sized banks in terms of assets. The total value of these debt securities amounted to 205 billion yuan ($29 billion). The media gave forth the relevant information with reference to data from the Shanghai Stock Exchange, the Shenzhen Stock Exchange, and Chinabond.com, a government website that publishes materials on the bond market.
Analysts at Shanghai brokerage firm Shenwan Hongyuan say that the specified total value of debt securities has been a record since 2020 when the Cabinet of Ministers of China decided to provide municipal authorities with the opportunity to issue special bonds to replenish capital in regional banking systems. This indicator is also 225% higher than last year’s figure. The total value of the special bonds issued in 2022 amounted to 63 billion yuan ($8.9 billion).
This week, senior officials of the Chinese Communist Party announced their intention to eliminate the risks associated with the problematic situation in the real estate sector, local debt, and difficulties faced by medium- and small-scale financial institutions. This statement was made during the annual Central Economic Work Conference. The report of the meeting notes that the authorities must assume that systemic risks will not materialize.
Currently, 4,000 small organizations belonging to the Chinese banking sector are faced with the prospect of a difficult future, in which the negative consequences of the crisis in the real estate market and growing debts after the coronavirus pandemic, which some experts call hopeless, can potentially be realized.
Currently, the mentioned financial institutions, including urban commercial lenders, rural banks, and rural credit unions, control assets with a total value of 92 trillion yuan ($13 trillion). This figure is almost 30% of China’s financial system. These banks are important suppliers of money to private enterprises, especially small companies that face problems obtaining loans from large financial institutions.
At the same time, the specified lenders have a high level of sensitivity to the economic downturn. These banks are heavily influenced by the crisis in the sphere of real estate and the financial mechanisms of local authorities, which are faced with a realistic prospect of defaults. Some such lenders have inefficient corporate governance and risk management systems. These organizations are also susceptible to corruption and financial irregularities.
Over the past year, the number of transactions in the banking sector has increased in China. At the same time, this sphere is currently located in a kind of turbulence zone, which so far does not have a catastrophic scale, but is too noticeable to be characterized as several isolated cases that do not affect the overall state of affairs. In May last year, thousands of depositors in Henan Province, located in central China, began protesting after their accounts were frozen at six rural banks in the region. In October of this year, in the eastern Chinese province of Hebei, depositors rushed to withdraw their money from a local financial institution. Against this background, officials were forced to publicly call on citizens to calm down. The Chinese state media published the relevant information.
In July 2020, the State Council of the Asian country allowed municipal authorities to recapitalize some small and medium-sized businesses using financial funds received as a result of the sale of special bonds. This decision was made after China’s central bank stated that 605 small financial institutions did not meet the minimum capital adequacy ratio of 10.5%. This indicator compares the lender’s capital with its risk-weighted assets and current liabilities.
Data from the stock exchanges of mainland China indicate that since 2020, the country has issued bonds of regional authorities totaling 438 billion yuan ($62 billion).
During the twice-a-decade Central Financial Work Conference the authorities of the Asian country promised to deal with the risks associated with small and medium-sized creditors promptly.
As we have reported earlier, China to Realize Proactive Fiscal Policy to Boost Economy.