Risks at Chinese City Banks - October 02, 2016

Risks at Chinese City Banks

The usually forgiving banking regulator of China had enough of the less than transparent financing of city banks and warned them to put an end to their rather risky practices. There’s a good reason for this: a 2008-like crisis may happen in China if smaller banks start to fold.

As Bloomberg reported, chairman of the China Banking Regulatory Commission, Shang Fulin said that “City commercial banks should change as soon as possible the situation of allocating more funds into investing than lending, and developing their off-balance-sheet businesses too fast.”

He believes that city banks should go back to their main business, meaning classical lending and having more and more deposit accounts instead of “opaque shadow financing”.

The problem behind this system is that small banks are showing growth, but they are lending to each other a lot. According to Moody’s, 34% percent of credit is interbank loan for small and medium banks in China, while the recorder must be Shanghai Pudon Development Bank with a breath-taking 75%.

These numbers started to worry the regulator, because one bank going bankrupt could lead to the bankruptcy of the whole “chain”, creating a situation much like the financial crisis of 2008.

Fulin mentioned that with these techniques, city banks may show good numbers, but they won’t be able to compete with big banks for the biggest clients anyway.

China is getting more and more serious about regulating its markets. They already planning to create a financial super regulator after the historical fell of their stock markets at the beginning of the year. This would be an important step for them, not only because of banking but their whole financial system.