China’s Small Banks Dumped on Signs of More Policy Pain in 2018

(Bloomberg) — China’s smaller banks started the New Year with a double whammy from regulators and investors, and more pain may be looming.

Bank of Tianjin Co. tumbled by as much as 12 percent in the first two trading days, the biggest two-day decline since its Hong Kong listing in March 2016, after rallying at the end of last year. Bank of Jinzhou Co., Bank of Qingdao Co., and Huishang Bank Corp. fell by more than 3 percent. In contrast, bigger rivals have rallied.

A policy announcement on Friday highlighted China’s tough stance toward smaller banks, which are already a target of government efforts to reduce leverage in the financial system. The People’s Bank of China said it will set up a mechanism for lowering banks’ reserve requirements as needed during the Lunar New Year festival next month, letting national lenders use as much as 2 percentage points of reserves to meet liquidity needs for 30 days. The small banks, which are often the most cash-strapped, were excluded.

“This shows regulators are unrelenting in deleveraging efforts,” said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co. Small banks seeking liquidity will have to borrow from bigger banks at higher costs, he added.

Bearing Brunt

China’s smaller banks have borne the brunt of a deleveraging campaign since April last year which has pushed up their borrowing costs, weakened profit growth and increased solvency risks, Natixis SA said in a December report.

Funding for smaller banks “has clearly worsened” because they lack large deposit bases, said Alicia Garcia Herrero, the firm’s chief economist for Asia Pacific.

The extensive branch networks of larger lenders lure deposits that act as a buffer as policy makers push ahead with deleveraging. Regulators ramped up financial supervision last year, targeting excessive interbank lending as well as the shadow financing that has helped some smaller lenders expand aggressively.

China’s changes that may hurt small banks include:

• Lenders with more than 500 billion yuan ($77 billion) of assets must classify their negotiable certificates of deposit as interbank liabilities from January this year. NCDs will be limited to a third of a lender’s total liabilities under the PBOC’s macro prudential assessment framework.
• The banking regulator will introduce three new quantitative indicators of commercial banks’ liquidity management, describing the current supervision of smaller banks as inadequate.
• The China Securities Regulatory Commission has started to restrict money-market funds from investing in NCDs issued by lower-rated banks.
• China announced plans to overhaul regulation of $15 trillion of asset-management products and break an implicit guarantee that drove investment into such vehicles.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at [email protected].

To contact the editors responsible for this story: Marcus Wright at [email protected], Paul Panckhurst

©2018 Bloomberg L.P.

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