China’s Baoshang Bank Overtaken By Regulators

Baoshang Bank, based in Inner Mongolia, will be taken over by China’s banking and insurance regulator over critical credit risks, according to a report by Reuters.

The takeover starts on Friday (May 24) and will last a year, both the Insurance Regulatory Commission (CBIRC) and the People’s Bank of China (PBOC) said on their respective websites.

Takeovers of banks are rare in China, and this is the first one in almost 20 years. The takeover highlights the troubles that smaller banks in China face, like poor capital buffers, inadequate internal controls, asset quality deterioration and others.

The China Construction Bank (CCB), based in Baotou, will handle the bank’s business operations. Baoshang Bank came into the spotlight after one of its main stakeholders, Tomorrow Holdings, was implicated in a crackdown by the government, which was looking for systemic risks by large financial organizations.

Some analysts worry that this is a sign of the volatility of the country’s financial health during the country’s economic slowdown.

Baoshang’s outstanding loans totalled 156.5 billion yuan ($22.68 billion) at the end of 2016, which is a leap of 65 percent since 2014. The bank’s non-performing loan ratio, as of December 2016, was 1.68 percent. The bank hasn’t presented any yearly reports since that time, saying it was going to find strategic investors.

In a statement, the CBIRC said that the principals and interest on saving accounts will all be fully guaranteed, and that the bank’s business operations won’t be affected.

In other CBIRC news, the organization recently released new guidelines aimed at getting banks to increase lending to small businesses.

According to a report in the Financial Times, the new directives were announced in March as China looks to overcome financing roadblocks in an effort to get the economy growing again. Economists have pointed to a lack of financing for small and privately owned businesses as the reason for the slowdown in growth.

The report noted that small businesses and private enterprises have suffered more from the government’s efforts to reduce financial risk, which decreased lending to those companies at a faster rate. Banks have been reticent to lend to small businesses in China because their default rates are higher.