China central bank head warns on regional lenders

The head of China’s central bank warned that some regional lenders had “overstretched” themselves and said their major shareholders they would face “primary responsibility” for any future bank failures.

Yi Gang’s comments mark the first time that he has spoken in detail about the risks brewing in China’s banking sector since the People’s Bank of China seized Baoshang Bank in May. Since then Jinzhou Bank and Hengfeng Bank, two other large regional lenders, have also been bailed out by the country’s biggest bank and China’s sovereign wealth fund respectively. 

“Some banks have been overstretching themselves beyond the regions they are supposed to serve and shifting their resources to high-risk fields,” Mr Yi said at a press briefing. “We have asked small and medium-sized banks to focus on the real economy by providing services to local clients. Otherwise their business won’t be sustainable and they won’t be able to resolve their financial risks.” 

Such “high-risk fields” include the issuance of wealth management products and other financial instruments that have been at the centre of what the PBoC has called a “three-year battle against major risks”, which was formally declared last year. 

Baoshang, Jinzhou and Hengfeng were among 28 listed Chinese banks that failed to report their 2018 financials on time this year, raising fears that a slew of other bank failures could follow in the world’s second largest economy. 

Earlier this month, Jinzhou, which was rescued by Industrial and Commercial Bank of China in July, finally reported an annual net loss of Rmb4.5bn ($627m) for 2018. In the first half of this year it lost an additional Rmb868m. 

Baoshang and Hengfeng have yet to release their 2017 financial results as well as their figures for 2018 and the first-half of this year. 

Mr Yi added that the central bank had and would continue to “pay special attention to protecting the rights and interests of average savers and investors and wealth management clients” in managing such rescues. But he warned other troubled lenders would be held accountable in the event that they too had to be bailed out. 

“These institutions must take primary responsibility for their actions,” he said. “Shareholders must be responsible for the actions of their banks and major shareholders need to have the ability to identify risks.” 

The head of the country’s sovereign wealth fund, China Investment Corporation, Peng Chun, said last week that financial failures would be a “fact of life” as economic growth continues to slow — and that the country’s largest financial institutions had to be prepared to help “turn bad banks into good banks”. A CIC unit, Central Huijin Investment, is involved in the rescue of Hengfeng bank along with the Shandong provincial government. 

Separately, Mr Yi, who was appointed PBoC governor last year, said the central bank would not follow its US and EU counterparts in rushing to cut rates or adopt other “drastic” measures to support economic growth. 

“China’s economy faces some downward pressure and headwinds but is still running in a proper range,” he said. “We are not in a rush to act as some other central banks have done recently [by adopting] drastic [quantitative easing] or [rate] cuts.” 

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