China’s bank regulator moves to rein in small lenders as Beijing fears financial risks
- After a number of easing measures during the pandemic, economic stability remains a concern in China as cheap funds flow into stocks and property
- Some lenders have been told to stop issuing structured deposits, but curbing such products – popular at small banks – could trigger liquidity stress
Many of China’s small and medium-sized companies have been hit by the international health crisis. And as they struggle to repay debts, pressure is mounting on the country’s small lenders.
“[Because of the] coronavirus epidemic and other factors, pressure is increasing on non-performing assets, due to the corporate governance of some small and medium-sized financial institutions and the return of disorder in markets. The potential risks and challenges remain relatively large,” said a press statement on Tuesday by the China Banking Association, an organisation of Chinese banks supervised by the People’s Bank of China (PBOC).
If there’s a larger scale of bankruptcies or restructuring in small banks, this would create a large shock to the system
The latest moves by the China Banking and Insurance Regulatory Commission to rein in small banks include curbing the growth of structured products – pre-packaged financial instruments that combine traditional bank deposits with higher-return derivatives linked to currencies, commodities or stocks, to lure in more funds.
The PBOC said in March that the minimum rates of return on structured deposits provided by some banks should be regulated because they are higher than those of usual bank deposits.
What’s more, China’s central bank wants to reduce financial arbitrage – in which companies take advantage of lower interest rates to issue bills and/or short-term papers, then invest in structured deposits for yield pickup instead of using the cheap funding for commercial activity, according to a note published in June by Japanese firm Nomura.
