There have been numerous recent conundrums in China's banking industry. One of the earlier incidents was that some rural banks in the Henan province saw a large number of customers unable to withdraw funds due to financial crimes such as illegal deposit absorption by major shareholders. Lately, because of the break in the capital chain of some housing companies, residential projects were suspended, resulting in the industry's proposal to break off loans. These successive cases not only attract the attention of the general public but also have a direct impact on the banking industry, the backbone of the country's traditional economic industry.
Researchers at ANBOUND pointed out that although these financial risks may seem small, they are indications that certain structural problems in finance have fermented to the social level. This would signify that the risk problems brought by rural banks and the financial risks in the real estate sector are constantly being exposed during the economic downturn, making some hidden risks gradually emerge. All these issues form a major challenge for the policymakers to prevent systemic risks in the second half of the year.
If the overall financial risk is considered, both the proportion of non-performing loans of banks and the proportion of high-risk small and medium-sized banks are still relatively low. Data show that as of the end of June, the total assets of China's banking financial institutions were RMB 360.4 trillion, a year-on-year increase of 9.6%. The total assets of the insurance industry were RMB 26.6 trillion, an increase of 11.1% year-on-year. The balance of non-performing loans of banking financial institutions was RMB 3.8 trillion, and the non-performing loan ratio was 1.77%, down 0.05 percentage points from the beginning of the year.
The provision balance was RMB 7.6 trillion, and the provision coverage ratio was 201.3%. According to the China Banking and Insurance Regulatory Commission (CBIRC), there are currently 3,991 small and medium-sized banks, including 147 city commercial banks, 2,196 rural credit cooperatives (including rural commercial banks, rural cooperative banks, and rural credit cooperatives), and 1,651 rural and town banks with total assets of RMB 92 trillion. The total assets of these small and medium-sized banks accounted for 29% of the total assets of the country's banking industry, and the cumulative disposal of non-performing loans of small and medium-sized banks in the past five years was RMB 5.3 trillion.
On the whole, small and medium-sized banks in China are running smoothly and developing healthily. Although there are still some problems, especially the existence of individual institutions that are relatively high-risk, and some are suspected of crimes, in general, the risks are controllable. The People's Bank of China (PBoC) also stated earlier that its rating results in the fourth quarter of 2021 show that among the 4,398 banking institutions participating in the evaluation, there are 4,082 financial institutions in the 1-7 level within the margin of safety, and the number of institutions accounts for 93% of the participating institutions in the banking industry. The scale accounts for 99% of the participating institutions in the industry. There are altogether 316 high-risk institutions. The number of high-risk institutions accounted for 7% of the participating institutions in the industry, but the asset size only accounted for 1% of the institutions participating in the banking industry evaluation. This signifies that the PBoC's ratings of the vast majority of the country's small and medium-sized banks are within the safe boundary. The central bank said that during China's 14th Five-Year Plan period, the number of high-risk institutions will be reduced to about 200.
Based on the overall indicators, it is true that the PBoC, the CBIRC, and other regulatory bodies have repeatedly emphasized that the "risks are controllable" in the Chinese financial sector, and "the main operations and risk indicators of the banking and insurance industry are within a reasonable range". That being said, researchers at ANBOUND believe that to prevent systemic risks, one should not only look at and deal with explicit risk factors from the overall data but also consider the evolution process of various risks. This is especially true in the hidden risks brought about by individual problems.
In terms of scale, the financial risk problems derived from the downturn in the real estate market may spread. With a large number of private real estate enterprises experiencing liquidity problems and credit defaults, this is causing scores of residential projects to remain suspended or even unfinished. Although there are not many personal housing loans that form non-performing assets, yet if the housing market continues to decline and a chain reaction is formed, not only will the unfinished personal mortgages be cut off, but a large number of homeowners will also experience negative equity as the housing market bubble bursts. This, in turn, will also increase personal mortgage defaults. In addition, the bankruptcy of upstream suppliers and builders of real estate enterprises may lead to a large-scale spread of accumulated financial risks in the real estate market, which will also pose a threat to bank credit assets. With the capital market beginning to adjust, and bank stocks continuing to decline, the outside world is alert to the exposure of bank credit risks caused by mortgage loans.
Although the current policy has begun to compensate the depositors, judging from the information disclosed therein, some of the cases of the Henan rural bank incidents involved the issue of illegal storage absorption and fundraising. That is, the major shareholder absorbed funds through the internet platform in the name of the bank without the funds being in the savings account of the relevant rural banks and instead transferred them through an illegal data provider. This is also the reason why the banking regulator does not characterize these off-book funds as "bank deposits". Such a process not only entails the management and operation of rural banks but also involves the supervision of financial internet platforms. If an institution, in the name of a bank, absorbs funds on the internet platform and transfers it to its account, whether it is in the name of "savings" or "financial management", it would be out of financial supervision. Furthermore, it used its app to defraud "depositors", and adapted technological means to establish an independent trading system to transfer funds in and out. As this is not only about the issues of authentic and fraudulent rural banks with financial licenses, but also the rectification of financial services on internet platforms, as well as the supervision of financial technology companies specializing in the data processing.
Researchers at ANBOUND are of the opinion that the problems exposed by these village banks indicate there are major loopholes in China's financial supervision system. There are a few questions of concern: How big are these significant risks? Do they only involve rural banks? Why is it so hard for regulators to find out the issues? How does the absence of regulations occur? All in all, financial regulation needs put bank account management, anti-money laundering, and even FinTech regulatory into consideration of the rules and implementation. After all, these hidden risks or blind spots in supervision could be utilized by criminals which will then not only bring huge losses to investors but also a major blow to the bank's reputation, posing a threat to the overall financial system. Chen Daofu, deputy director of the Institute of Finance of the Development Research Center, also mentioned the importance of maintaining the credibility of the financial system. Finance operations depend on credibility, and when analyzing risks in the financial system, one should not only pay attention to individual and visible risks, but also invisible risks caused by trust issues. For the financial system, maintaining the credibility of the financial and banking system is highly essential.
Final analysis conclusion:
Judging from the trend in the second half of the year, China's economy is currently showing a trend of rebounding. This is a positive factor for the country's banking industry and the overall financial sector to defuse risks. However, when various risks continue to appear and structural contradictions become prominent, the relevant authorities should not take the task of financial risk prevention lightly. At the same time, it is also necessary for them to properly consider structural reforms and comprehensive financial supervision, so as to avoid the emergence of blind spots that cause the hidden risks to be explicit.
