Beijing dislikes bailing out state companies—particularly banks—but can’t seem to kick the habit. The latest example is Bank of Jinzhou.
On Thursday, this small Northern lender said it was in talks with possible strategic investors. The bank has struggled since regulators’ unexpected takeover of one of its peers in late May spooked debt markets.
China’s largest state-owned commercial bank and two of the country’s centrally administered “bad banks” are behind the potential investors, according to Chinese financial media outlet Caixin. Regulators also met in recent days to discuss liquidity problems at the Bank of Jinzhou, Reuters reported.
What is interesting is the contrast with Baoshang Bank, whose takeover originally sparked the debt market flare-up in June. When regulators first said they were taking control, they were explicit that, retail deposits aside, only liabilities of 50 million yuan ($7.2 million) or less would be fully guaranteed without question. Chinese money markets promptly panicked.
To calm things down, the central bank not only injected massive amounts of cash into the banking system but also walked back its initial tough stance. A central bank-affiliated newspaper reported that 99.98% of Baoshang’s corporate creditors were being fully repaid. On top of that, holders of Baoshang’s negotiable certificates of deposits, or NCDs, a type of short-term funding instrument, were allowed to directly swap over 40 billion yuan of their pre-takeover holdings for new NCDs fully guaranteed by Beijing.
Meanwhile, markets first focused on Bank of Jinzhou when the bank’s 2018 auditors resigned in early June, a few days after the Baoshang takeover. As Bank of Jinzhou increasingly struggled to raise affordable funds, Beijing was forced to indirectly support it by greenlighting the issuance of a credit-default swap-like instrument for its NCDs by a state-owned credit insurer.
This halfway measure wasn’t enough. Baoshang Bank has successfully refinanced much of its NCD debt, and the overall market for NCDs has calmed. But Bank of Jinzhou, with only a partial and indirect guarantee, has continued to struggle. It has only raised 600 million yuan of NCD funding in July so far, less than a 10th of what it raised in June, according to Wind. Since about 10% of the bank’s total liabilities at end-2017 were NCDs, that represents a significant problem.
It now looks like another more comprehensive bailout may be on the way. That may once again reassure markets in the short term, but unless creditors take a real haircut this time, it compounds the moral hazard problem at the heart of China’s banking system. The country’s ever-growing debt pile is a long-term problem that is proving very hard to address.
Write to Nathaniel Taplin at email@example.com
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