Banking crisis: China has its own version of the problems

As China walks a fine line with its 5% growth target, these firms have a big role to play: they make up a large part of the industrial complex, produce about 60% of the gross domestic product, and make up a significant portion of the gross domestic product. export. Beijing began discussing measures to help small and medium-sized enterprises, or SMEs, in January this year. President Xi Jinping urged these enterprises (as many times before) to hum and release goods with the promise of profit.

But stuck small and medium enterprises remain in decline. As of February, current performance, based on factors such as production, new orders, investment, inventories and profitability, was close to multi-year lows. Upbeat growth rhetoric of late has not helped lift the mood.

By the start of the pandemic, these companies — mostly cyclical sector producers — were already weak. Then, in the midst of the Covid measures, things got even worse: as one survey showed, about 85% of businesses did not have enough money to survive a three-month shutdown. The main issue is loan repayment.

Now, to keep production lines running and comply with Xi’s directive, loans to companies are growing at the fastest pace in a year and a half, outpacing loans to households. This is reflected in China’s smaller regional lenders, whose assets are growing almost as fast as their larger state-owned counterparts, which tend to cater to large enterprises.

The weakest of the small corporations, short of funding and unable to draw on credit lines, turned again to the underside of the financial system: shadow banking, long a form of off-balance sheet financing for China’s industrial complex. There is an increase in riskier loans issued by trust companies, which are funded by structuring such borrowings into wealth management products. The volume of trusted debt – borrowed between companies with creditors in the middle as agents – has also increased. Although they are not close to the peaks of 2017, before the aggressive deleveraging campaign that hit many companies and bank-like institutions, a return to bad habits is worrisome.

Meanwhile, urban and rural commercial lenders are no better off than SMEs. Small banks were usually bad asset warehouses. Their capital buffers are weak, limiting their ability to deal with NPLs (in theory from small NPLs). Net interest margin is low and continues to decline. Their management and priorities are in many cases determined locally, and credit risk is not always the main one. Their systemic correction and eradication of rot did not happen.

In February, Beijing released draft stringent measures in line with global regulations to help lenders classify assets by risk type and business size. The focus of these rules is on determining the overall ability of borrowers to repay their debt, not just credit, indicating a growing concern about the financial health of companies, not just banks’ books. However, as the global setbacks and bailouts of the past month show, it is not enough to simply be aware of the risks. Under China’s new super-regulator, if institutions are forced to do something about loans that are likely to fail, it will be difficult for lenders to absorb them. With an unstable global banking system, it is unlikely that Beijing will take any step that will shake its confidence. These rules will come into force next year.

Now Beijing wants even more SMEs: by the end of this year, it hopes to have 150,000 “innovative” small businesses and more than 10,000 “little giants.” Stuck in this fatal loop, it will be difficult for these new firms to get off the ground and for the old ones to survive. Without painful and surgical changes, their fate and their creditors won’t change anytime soon.

Anjani Trivedi is a columnist for Bloomberg Opinion. It covers industries including politicians and firms in engineering, automotive, electric vehicles and batteries in the Asia-Pacific region.