BOFIT Viikkokatsaus / BOFIT Weekly 2019/23

Bank of Jinzhou’s announcement last Friday (May 31) that it was changing its auditors precipitated a strong reaction from China’s bond markets. Ernst & Young’s auditing team quit after differences arose with the bank’s management.

The auditors said the bank failed to provide the requisite information and documentation on credit reviews of loan recipients, which raised suspicions that some corporate clients were using their credit for purposes outside the loan agreements. The bank’s 2018 financial statement have yet to be published or ratified. Bank of Jinzhou’s total assets (about 110 billion dollars) make it slightly larger than Baoshang Bank, which officials recently took over (see BOFIT Weekly 22/2019). One of the main indicators of Baoshang’s distress was the refusal of its management to release the financial statement.

Like Baoshang, Bank of Jinzhou expanded rapidly in recent years. Its balance sheet grew by nearly 50 % in 2016 and over 30 % in 2017.  In particular, lending to industrial firms grew quickly. Jinzhou Bank is mostly owned by private Chinese investors. It has a very broad ownership base. Jinzhou shares are listed in Hong Kong. Trading in Jinzhou shares was suspended in April on the delayed release of the bank’s financial statement. However, there is still a market for Bank of Jinzhou’s debt instruments (AT1 instruments), which will be first in line to cover the losses of weakened solvency of the bank. The market price for Bank of Jinzhou AT1’s on Monday (Jun. 3), was about 78 % of their nominal value.

With the severe troubles of two privately held banks within two weeks, wider concerns have arisen about the condition of the Chinese banking sector, particularly small and mid-sized banks and the correctness of financial statements. Small banks are especially dependent on funding from the interbank market, so increased uncertainty can cause their financial health to degrade quickly. The People’s Bank of China attempted to calm markets last weekend by declaring that it had no plans to take over any more banks.