Banks in China are failing at an unprecedented rate due to a severe slowdown in the country's real estate market, weak risk controls and other problems.
In the week ending June 24, 40 small banks were swallowed up by larger institutions, a number dwarfed even by the savings and loan crisis of the 1980s and 1990s, The Economist reported.
The report tracks roughly 3,800 lenders in rural China that hold a whopping $7.5 trillion in assets, or 13% of the entire banking system, that is beginning to bleed from an excess stock of bad loans. Some of them have admitted that up to 40% of their portfolios are non-performing loans.
Thirty-six of the 40 failed institutions were gobbled up by one giant lender: Liaoning Rural Commercial Bank, which was created by regulators in September to run bad banks.
According to The Economist, five similar institutions have been created in the past 10 months with the same goal of taking over small bad banks. Critics warn this will only lead to "bigger, badder" banks.
At the same time last year, the Chinese economy showed numerous signs that it had hit a wall, including sharp declines in housing construction and sales, consumer confidence and consumer prices, coupled with a shrinking population and a sharp rise in debt as a percentage of GDP.
But while China's economy struggles locally, its biggest banks continue to thrive, consolidating failing institutions and radically increasing their market capitalization.
According to S&P Global, Industrial and Commercial Bank of China Ltd. (ICBC), China's largest bank, maintained its position as the largest bank in Asia-Pacific in the second quarter of 2024, while China Construction Bank Corp, the second-largest bank in China, recorded the largest increase in market capitalization for the quarter, rising by 21.4%.
S&P Global also reports that “the weak may get weaker,” with smaller institutions likely to be most vulnerable to an expected “prolonged real estate downturn” and the government becoming more selective about who it wants to bail out.
“On average, rural banks had the highest levels of non-performing loans, the lowest profitability and the weakest capital reserves and reserve coverage at the end of 2023...
“Over the next two to three years, more financial institutions may find themselves in difficulty. The failure of two rural banks in Liaoning province in 2022 is a sign that government support is becoming more selective. However, any reduction in support for poorly managed financial institutions may be gradual, given that there are many weak small banks in the system.”
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