BOFIT Viikkokatsaus / BOFIT Weekly 2019/48

The Financial Stability Report released by the People’s Bank of China this week warns of considerable risks accumulating in the financial sector due to the ongoing slowdown in economic growth and structural economic problems it exposes. The report notes, however, that risks related to key actors have no more increased.

The PBoC performed stress tests on 30 large and mid-sized banks. The tests revealed that the quality of loan portfolios held by the sampled banks would rapidly degrade in the event of an economic slowdown. Even in the rather benign scenario, where real GDP growth falls to 5.3 % p.a., the stock of non-performing loans rises from 1.5 % to 5.4 % of all loans, while capital adequacy ratios fall from 14.5 % to 13.5 %, a level the PBoC still considers satisfactory.

Based on its risk assessment, the central bank divides into ten categories the various financial sector entities subject to banking supervision (e.g. all banks, corporate financial institutions, car finance companies, consumer finance companies and finance leasing companies). Risk is small for most large banks, but some carry mid-level risk level. In contrast, 586 actors out of 4,355 small and mid-sized financial institutions fall into the high-risk category. The PBoC says private and foreign financial companies typically receive good scores, while many rural banks belong in the high-risk category.

Indeed, the government has had to bail out some small and mid-sized domestic banks this year. At the end of May, officials took over Baoshang Bank. In July and August, public funds were expended on recapitalising the Jinzhou and Hengfeng banks. In November, the government bought out the stakes of six private shareholders in Harbin Bank. October and November also brought runs on the small Yingkou and Yichuan banks. The runs occurred despite the fact that Chinese deposit insurance fully covers deposits up to 500,000 yuan (nearly 65,000 euros). Increased uncertainty has driven up financing costs for small banks, forcing them to raise their deposit rates to attract new depositors and retain long-term depositors.