China banks get lifeline from local governments

Bloomberg

China’s local governments are helping inject fresh capital into small lenders across the country, part of an expanding campaign to restore confidence in the world’s largest banking system.
At least 10 small Chinese banks have raised money this year by selling shares packaged with non-performing loans, in several cases to buyers controlled by local authorities. In at least one deal, the NPLs were sold at above-market rates.
The transactions, while modest in number given China has 3,000-plus small banks, show the determination of local authorities to shore up the linchpins of their district economies. The health of small banks has become a growing concern after the seizure of one lender in May forced losses on creditors and cast doubt on the longstanding assumption that the state would always backstop troubled banks.
The capital injections amount to “local government bailouts through cash rich state-owned enterprises,” said Alicia Garcia Herrero, chief economist for the Asia Pacific region at Natixis SA. Regulators have learned it’s better to rescue troubled banks indirectly to limit the risk of contagion, she said.
As part of their efforts to stabilize the industry, regulators are considering a plan that would encourage problematic banks with less than 100 billion yuan ($14 billion) of assets to merge or restructure, people familiar with the matter said last week. Local governments would be held responsible for dealing with troubled lenders, with the central bank providing liquidity support if necessary, the people said.
The China Banking and Insurance Regulatory Commission didn’t respond to a fax seeking a comment on the deals.
Zhou Liang, vice chairman of the CBIRC, said that regulators would try as much as possible to avoid using “a scalpel” on individual banks because the risk of contagion is high even if a lender is small.