China Financial Chess: In an intriguing financial maneuver, Chinese local governments are orchestrating an unprecedented sale of special bonds to inject much-needed capital into smaller banks grappling with the dual challenges of a deepening property crisis and a sluggish economy. These special-purpose bonds, often reserved for specific policy objectives, are now earmarked to purchase equity or convertible bonds from struggling state-owned banks, marking a strategic effort to recapitalize these financial institutions. However, despite a record-breaking 152.3 billion yuan ($21.05 billion) raised in 2023, analysts caution that the funds fall short of addressing the substantial capital needs of China’s small and medium-sized banks.
The urgency to address this capital shortfall becomes apparent as China’s regional banks face an estimated 2.2 trillion yuan deficit, assuming up to 20% of them grapple with capital inadequacy, as outlined in an October report by S&P Global Ratings. The issuance of special-purpose bonds, more than doubling from 2022 to surpass 63 billion yuan, underscores Beijing’s commitment to preventing a financial crisis reminiscent of 2008. This trend also sheds light on the increasing reliance on government support to prop up smaller banks, especially amid a deepening crisis in the property market, a cornerstone of China’s economy.
Despite Beijing’s measures to bolster real estate, such as relaxing home purchase restrictions and reducing borrowing costs, these efforts have failed to stimulate a meaningful recovery. The People’s Bank of China (PBOC) and the National Financial Regulatory Administration (NFRA) remain silent requests for comments, leaving the specifics of this financial strategy veiled in uncertainty.
The intensified efforts to support smaller banks come amid growing concerns about ballooning local government debt, reaching a staggering 92 trillion yuan ($12.6 trillion) or 76% of China’s economic output in 2022, up from 62.2% in 2019, according to the International Monetary Fund. While policymakers express deep apprehensions about rising debt levels, Beijing finds itself compelled to support smaller banks to mitigate spillover risks, creating a delicate financial balancing act.
Gavekal Dragonomics researcher Zhang Xiaoxi emphasizes the criticality of averting failures in even the smallest institutions, fearing that a single failure could trigger a chain reaction, spreading financial contagion to other institutions. The lack of clarity on whether central authorities provided guidance to local governments on recapitalizing smaller banks and the identity of the buyers for these special-purpose bonds adds an intriguing layer to this financial puzzle.
Provinces are accelerating plans to reform and mitigate risks at local high-risk banks, as well as replenishing capital through multiple channels, as stated by central bank governor Pan Gongsheng earlier this month. However, this intensified issuance of fresh debt by local governments to recapitalize banks, coupled with their own burgeoning liabilities, further complicates the financial landscape.
Beyond the $21 billion raised this year, the Henan provincial government recently unveiled plans to issue 28.2 billion yuan worth of special-purpose bonds to recapitalize 26 local banks, as disclosed on the government website. This underscores the widespread nature of this financial maneuver and the ongoing challenges faced by regional banks.
Smaller regional banks emerge as the weak links in China’s colossal $61 trillion financial sector, grappling with concentration risks in industry, sector, and geography, coupled with opaque governance structures and lax regulatory oversight. As of end-September, China’s rural commercial banks reported a 3.18% non-performing loan ratio, with city commercial banks at 1.91%, surpassing the 1.61% average in the banking sector. Analysts believe the actual amount of soured loans is significantly higher.
Smaller Chinese banks encounter formidable challenges in raising funds to replenish their balance sheets, given their lower creditworthiness, limited operating scope, and higher-risk profiles. Top issuers of special bonds this year include debt-laden provincial governments in Liaoning, Yunnan, and the Inner Mongolia region, aiming to utilize the proceeds for the recapitalization of local banks.
In a research note last month, S&P Global Ratings highlighted that regional banks in weaker regions, heavily exposed to indebted local government financing vehicles, bear higher credit risks than their counterparts in wealthier regions. As they serve as the likely first line of defense during regional bank stress, local-government support for strained lenders is expected to be selective.
In the complex dance of local governments, banks, and economic challenges, the heightened issuance of special-purpose bonds emerges as a pivotal strategy in China’s evolving financial landscape. As the country navigates the aftermath of the property crisis and economic headwinds, these financial maneuvers underscore the intricate interplay of various elements in China’s economic narrative, revealing a high-stakes financial chess match.
Our Reader’s Queries
What is the difference between Chinese chess and American chess?
Chinese chess differs from Western chess in that it is played on the intersection of lines, or points, rather than on two-toned squares. This unique pattern was inspired by the game of go, which was already popular in China before chess was introduced from India.
When was chess banned in China?
For the initial eight years of the Cultural Revolution (1966-1976), Chess was prohibited in China. However, in 1974, the ban was relaxed, and China started participating in international competitions. The first international competition was held in 1976.
Is Chinese chess popular in China?
Chinese chess, or Xiangqi, is a beloved game that has captured the hearts of many in China and beyond. Its popularity extends to the Chinese diaspora, making it a widely recognized pastime. Stay informed about China’s cultural offerings and its impact on the world by signing up for CNN’s Meanwhile in China newsletter.
Is chess or xiangqi harder?
When it comes to legal board positions, xiangqi outnumbers chess by a factor of 10. However, due to its larger board, xiangqi’s game tree complexity surpasses that of chess by a staggering 37 orders of magnitude. Despite personal experience playing both games, chess may seem more intricate, but xiangqi proves to be significantly more challenging.