China’s local governments are spending billions of dollars to recapitalize the country’s cash-strapped small banks and accumulating even more debt as default risks facing many regional economies rise.
American credit rating agency Standard & Poor’s Global Ratings said Chinese local governments have borrowed a total of 152.3 billion yuan (US$21 billion) so far this year, including in Liaoning Province, a financially vulnerable region of China. , estimated that Gansu province replenished the balance sheets of small banks in China. Inner Mongolia, Henan Province, Heilongjiang Province. According to the agency, total borrowings in 2022 were 63 billion yuan.
Chinese regulators have stepped up oversight of the country’s small lenders in recent years. The sector, which is supposed to support the economy at the county and rural levels, is plagued by poor governance, fraud and weak balance sheets.
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Last year, the People’s Bank of China (PBOC) identified 366 “high-risk” financial institutions, including urban commercial banks, rural commercial banks and village banks. A lack of liquidity among China’s local banks could destabilize the state-owned financial system, reduce the supply of credit to the real economy, and spread to a wide range of industries.
Special purpose bonds are a type of off-budget debt that local governments use to raise funds for specific policies or infrastructure projects, or to solve specific problems. In recent years, proceeds from these bonds have also been earmarked for subsidized housing, environmental protection, and new energy. Although these bonds are not considered part of the official budget, the debt they accumulate has increased significantly every year since 2019.
In 2020, the Ministry of Finance approved the raising of special purpose bonds worth a total of 550 billion yuan to support small banks. An estimated 74.7 billion yuan remains in the quota, according to S&P estimates.
“The purpose of small bank consolidation is to achieve better risk diversification,” said Nicholas Zhu, senior credit officer at Moody’s Investors Service. “Questions remain as to whether that risk diversification is significant enough to improve overall capital adequacy. It certainly helps, but it will probably protect the capital base in the future even after the merger.” You may need it.”
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According to Zhu’s calculations, the 550 billion yuan limit will account for only about 0.9% of regional banks’ risk-weighted assets by the end of 2022. Risk-weighted assets are used to determine the minimum amount of capital a bank must hold, taking into account its exposure to risk in loans and other assets.
Luo Zhiheng, chief macroeconomic analyst at Yuekai Securities Research, said the increasing role of local governments in the local economy, such as curbing risks in the small banking sector, could worsen local governments’ fiscal problems. . Many local governments that have relied on income from land sales have been hit hard by the real estate crisis.
“At present, local governments have come to rely on special purpose bonds as a means to fill the funding gap,” Luo wrote in Caixin on September 22. Items that do not provide economic benefit or are intended solely for the purpose of paying salaries or for any other purpose. ”
Additional reporting by Ji Siqi