ICBC and China Construction Bank Lead Amid China’s Small Bank Collapse

• China is experiencing an alarming rate of bank collapses, driven by a downturn in the property market and inadequate risk management.
• In a single week ending June 24th, 40 smaller banks were acquired by larger institutions, a stark comparison to the savings and loan crisis in the U.S. during the 1980s and 90s.
• A report on rural Chinese banks, which hold $7.5 trillion in assets, reveals that up to 40% of their portfolios may consist of non-performing loans.

China’s banking sector is undergoing significant turbulence as smaller banks collapse, leading to massive consolidations.

Spike in Bank Failures Amid Property Market Downturn

China is witnessing an unprecedented wave of bank failures, primarily triggered by a significant decline in the property market and insufficient risk controls. In an alarming trend, 40 smaller banks were subsumed by larger financial institutions in just one week, highlighting severe systemic vulnerabilities.

Impact on Rural Financial Institutions

The crisis’s epicenter is rural China, where approximately 3,800 lenders oversee $7.5 trillion in assets, accounting for 13% of the national banking system. These rural banks are grappling with a high volume of non-performing loans (NPLs), with some institutions disclosing that up to 40% of their loan portfolios are at risk.

Role of Mega Banks in Stabilization Efforts

A significant development has been the absorption of 36 out of the 40 failing banks by Liaoning Rural Commercial Bank, a regulatory creation from September aimed at managing distressed banks. This trend is part of a broader strategy where five similar institutions have been established over the past ten months to handle small, troubled banks. However, this consolidation may create larger, more problematic financial entities, as critics argue.

Contrasting Fortunes of Major Banks

While these smaller entities struggle, China’s major banks continue to expand. Industrial and Commercial Bank of China Ltd. (ICBC) retained its position as the largest bank in the Asia-Pacific region in Q2 2024. Simultaneously, China Construction Bank Corp, the second-largest, saw a substantial market cap increase of 21.4%. This dichotomy highlights the robustness of major banks against the fragility of smaller ones.

Future Outlook: Continued Consolidation Expected

According to S&P Global, the weaker financial institutions are only expected to deteriorate further with the property market likely to remain in a prolonged downcycle. The Chinese government appears to be selective in offering support, which raises concerns about future banking stability. For instance, two rural banks in Liaoning province went bankrupt in 2022, signaling a shift towards more selective governmental intervention.

Conclusion

China’s banking sector is in the midst of a significant reconfiguration, primarily driven by the economic slowdown and resultant property market crisis. The rapid consolidation of smaller banks into larger institutions raises questions about long-term stability. As the government adopts a more selective approach to financial support, the future for many small banks looks increasingly uncertain.