HONG KONG (Reuters Breakingviews) - China’s Big Four lenders are feeling the pressure. Beijing, trying to slash a $310 billion pile of officially recognised bad debt, is pushing giants like China Construction Bank to help troubled smaller rivals, or rescue them outright. First-half earnings look healthy enough, but softer credit figures suggest they are already moving to shield their balance sheets.
CCB, the country’s second-largest lender with 24 trillion yuan in assets, is a leader in efforts to rescue troubled state-owned borrowers through debt-for-equity swaps. In May, it was brought in to help the government’s takeover of Baoshang Bank, by handling its day-to-day business. That move was quickly followed by similar interventions at the Bank of Jinzhou and Hengfeng Bank involving other central institutions. There are almost certainly more to come.
The country’s four heavyweights - CCB, Bank of China, Industrial and Commercial Bank of China, and Agricultural Bank of China - hog deposits and the best state clients. But they also lend to smaller institutions who provide credit to riskier private enterprises, a critical economic function. When the cost of borrowing for less sturdy banks relative to healthier peers blew out after Baoshang, the state giants appear to have simply increased short-term lending while regulators made reassuring noises. Spreads narrowed again.
But now the big boys have cause to worry they’ll be asked to do far more than issue short-term loans. The market still has little visibility into how much trouble some of these smaller institutions are in, especially those with portfolios concentrated in struggling regions in western China.
CCB did manage to increase earnings by a decent near-5% in the first half. But its net interest margins contracted, and it cut loans to other institutions in the interbank market by a quarter from the end of December. Bank of Communications, the number five lender, reduced its exposure too, albeit by a smaller margin. Half-year figures also suggest smaller banks are having more difficulty raising funds from peers.
The risk is a vicious cycle in which large lenders’ caution creates stress at the lower end of the financial food chain, pushing more minnows into trouble. New yuan loans dipped nationally more than expected in July. There could be more pain ahead.
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