BOFIT Viikkokatsaus / BOFIT Weekly Review 2019/22

Faced with insurmountable financial difficulties, Baoshang Bank, which operates mainly in Inner Mongolia, was taken over last Friday (May 24) by the China Banking and Insurance Regulatory Commission (CBIRC) and the People’s Bank of China. Officials explained the takeover was justified by the need to protect the interests of small depositors and other customers.

Baoshang’s day-to-day operations have been farmed out to state-owned China Construction Bank. The central bank also announced it will give liquidity support for the troubled bank. Baoshang’s most recent annual financial statement was filed in 2016.

Excessive credit risk, a high-growth strategy and overreliance on funding from the interbank market sealed Baoshang Bank’s fate. The bank’s solvency has been weaker than that of most rivals, and has been declining for years. On paper (according to the latest available figures), the bank still enjoyed decent profitability, but the decline in the quality of its lending portfolio is not necessarily reflected in profits. The share of non-performing receivables on the balance sheet increased, but the bank only reported a modest less-than 2 % share at the end of 2016.

Baoshang experienced rapid growth this decade. During 2013–2017, its total assets more than doubled and lending to the public nearly tripled. Deposits, however, failed to keep up with the lending spree, making Baoshang extremely dependent on borrowing from other banks. The bank’s debts to other banks nearly quadrupled during 2013–2017.

Baoshang is small enough that its collapse will probably not have major systemic implications. Yet it still ranks among China’s top 50 banks and employs a staff of about 8,000. The size of the bank’s balance sheet is only a couple per cent larger than that of ICBC. However, the incident could have wider implications, if it weakens public confidence in other small regional banks. China’s banking system is mostly in government hands, but Baoshang’s majority owner was a private entity called Tomorrow Holding Group.

China has a number of small and mid-sized banks whose growth has been similar to Baoshang’s in recent years. However, they generally seem to have better solvency ratios and they have not expanded as fast as Baoshang.

According to the CBIRC statistics, there are about 4,000 banks currently operating in China. The five largest commercial banks control about 40 % of the banking sector’s total assets. China’s twelve joint-stock banks represent about 20 % of sector assets. There are around 130 city commercial banks that control just over 10 % of sector assets, as well as three policy banks that have a combined 10 % share. Other banks, mostly rural banks and the postal bank, account for about 20 % of banking sector assets. In recent years, small and mid-sized banks have rapidly expanded their balance sheets.

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