China rolls out major rural bank overhaul amid ongoing financial risk prevention push

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4th December 2023 – (Beijing) China has merged approximately 130 small lenders into a single entity in Henan province. This consolidation follows a cash shortage that caused a series of unusual depositor protests at local Henan banks over a year ago. The restructuring aims to strengthen oversight and eliminate systemic vulnerabilities in the rural banking sector.

The newly established Henan Rural Commercial United Bank, which was launched in October with a registered capital of 6 billion yuan, is the fourth consolidated rural lending institution created under China’s recent reform agenda targeting the rural credit system. State media has dubbed the new bank a “ballast stone,” symbolising stability and resilience against financial risks.

The crisis that sparked this reform centred around four rural banks in Henan and one in the neighbouring Anhui province. These incidents, which involved approximately 40 billion yuan in deposits, led to investigations into senior financial officials and rural lenders and resulted in the arrest of a criminal gang. In response to this, Beijing enforced a stringent crackdown on financial crimes to maintain social stability.

This restructuring in Henan is in line with President Xi Jinping’s recent reiteration of ongoing financial risk mitigation as an “eternal theme.” This priority is likely to be a focal point at the upcoming annual Central Economic Work Conference, typically held in December.

Both analysts and officials are optimistic that these changes will restore stability and address asset quality issues within Henan’s finance sector. Challenges such as weak governance, corruption, exposure to the property market, and widespread shadow banking have made it difficult to assess and resolve local government debt burdens.

According to recent statements, national financial regulators are prioritising reforms and risk management involving small and medium institutions. Provinces are being instructed to develop tailored plans instead of a generic, one-size-fits-all approach.

However, experts warn that ongoing vulnerabilities linked to the property sector and local government financing could continue to pressure loan demand and asset quality. These risks tend to affect smaller banks disproportionately compared to state-owned institutions.

While China’s central bank stated in November that overall financial risks are “generally controllable,” with high-risk banks representing less than 2% of total banking assets, top lawmakers have cautioned that the reported asset quality metrics for small lenders appear “inflated” and do not reflect the actual situation. Regulatory forbearance on some real estate loans may also be concealing risks.

If the property sector’s problems persist into 2024 and begin affecting other industries, it could trigger a dangerous downward spiral. Although housing loans constitute only 23% of outstanding credit, sharp price declines could cause panic selling.