Debts and pandemic sinking China’s small banks

Depositors in two local banks rush to withdraw savings. Local lenders are burdened by huge bad loans. Local governments, small businesses and farmers are the main debtors. China’s total domestic debt hit 317 per cent of GDP. The central bank is looking at US$ 28 billion to recapitalise these banks.

Beijing (AsiaNews) – China’s small banks are in trouble, burdened by the pandemic-related economic crisis and bad loans.

Last Saturday, depositors at the Baoding Bank in Baoding (Hebei) rushed in to withdraw their savings. A few days earlier, the same happened at the Yangquan Commercial Bank in Yangquan, a city in Shanxi province.

Local authorities intervened to stop the panic, stating that the two institutions had no liquidity problem. Some people were arrested for spreading information that caused panic among depositors.

Over the past year, bank runs at small financial institutions have multiplied. Bank deposits in China are guaranteed up to 500,000 yuan (US,000), but investment wealth management products and trust investment plans are not.

Small banks, especially in provincial towns, are carrying a lot of bad loans that are not likely to be repaid. To restart the economy after lifting the lockdown, the government has ordered banks to grant subsidised loans to businesses.

Now many banks find themselves undercapitalised. Their main debtors are local administrations which, following the indications of the central government, had turned to local financial institutions in the past ten years to fund their infrastructure spending.

Usually, local banks also finance small businesses and farmers, who are the most affected by the coronavirus emergency.

The recession, caused by the pandemic and aggravated by the tariff war with the United States, has pushed up China’s public and private debt. According to the International Institute of Finance, China’s total domestic debt hit 317 per cent of GDP in the first quarter of this year.

The government had to intervene last year to save the Baoshang Bank in Inner Mongolia, the Jinzhou Bank and the Hengfeng Bank. Now the South China Morning Post reports that the central bank is considering creating a recapitalisation fund for small banks short of capital. This would amount to 200 billion yuan (US$ 28 billion).

• china
• banks
• economy
• crisis
• pandemic
• crisis
• lockdown
• coronavirus
• covid-19
• recession
• trade war
• gdp