Could northeast China be the hotbed of its next banking disaster?
” VSABBAGE HOUSES â have brought Hegang notoriety in recent years. Apartments in the small town in far northeast China sell for shockingly low prices, some for as little as $ 3,500 a piece, making them compare to cheaper items in vegetable markets. The economic outlook for the region has been so bad for so long that it cannot retain residents. The city, located in Heilongjiang Province, has lost around 16% of its population in a decade. Cabbage Houses were built by the government to help alleviate poverty, but they have found few buyers. The local government is now struggling to repay its debts and is restructuring its finances. At the end of December, officials said they had stopped hiring new government employees in order to save money.
Hegang is one of the many dark stories from China’s Rust Belt provinces of Heilongjiang, Jilin, and Liaoning. Russia’s border region, known for its long and extremely cold winters, has gone through years of depressed economic conditions with the closure of state industrial factories and the migration of young people south. Poor energy infrastructure has caused businesses in the region to be disproportionately affected by a severe power shortage in 2021. In a desperate attempt to prevent families from relocating and spur population growth, Jilin said. that she would provide “consumer loans for marriage and childbirth.” Up to 200,000 yuan ($ 31,500) to couples.
The misery is also raising concerns about the region’s banks, whose combined assets stood at 15.8 billion yuan in September. Bad debts are already higher in the northeast than in any other region of China; provisions for loan losses are the lowest. Yet spotting an emerging crisis is a difficult task. Hiding bad debt is an easy trick for small banks. Local regulators are understaffed. And you can’t rely on national rating agencies to identify problem lenders. In the first seven months of 2021, rating agencies downgraded just six banks. They often only act when a lender is on the brink. Jilin-based Huancheng Rural Commercial Bank, for example, suddenly said its net profits fell 42% soon after its downgrade.
For an insider’s perspective on China’s problematic banks, watch how much investment managers at the country’s largest lenders charge for loans to smaller ones. Most banks across China pay similar yields on negotiable certificates of deposit (MNTs), securities that look like short-term loans from one bank to another and that trade on the interbank market. Returns paid on MNTs issued by most banks across the country fell throughout 2021, signaling a decrease in perceived risk. Yet those paid by issuing banks in the three northeastern provinces diverged from the others throughout 2021 (see chart).
The average premium paid over one year MNTBanknotes issued by Liaoning banks, relative to those in healthier provinces, fell from around 0.24 percentage points in February to 0.65 by the end of the year, according to Enodo Economics, a firm of ‘studies. Banks in Heilongjiang and Jilin paid similar premiums. The higher yields indicate that the big banks believe that local governments in the northeast may find it difficult to bail out their financial institutions in the event of a crisis, Enodo analysts said. (The surveys MNTs were always classified as AAA, as secure as possible, by rating agencies, however.)
The northeast is a prime candidate for hosting China’s next banking disaster. Of the top four bailouts of city commercial banks since 2019, two were based in the region. Regulatory and corporate governance failures have resulted in some institutions falling under the influence of private companies or individuals, who distort their loans. Shengjing Bank, a large Liaoning-based bank with 1,000 billion yuan in assets, has strong exposure to Evergrande, a failed real estate developer. Some of the region’s lenders have lost billions of dollars when financial products have gone bad. Liaoning regulators recently planned to merge 12 troubled banks in an attempt to avert a crisis. This plan was then watered down to just two. It is not known how the issues of the remaining ten lenders will be handled. â
For a more in-depth analysis of the biggest stories in economics, business and markets, sign up for Money Talks, our weekly newsletter.
This article appeared in the Finance & Economics section of the print edition under the title “Exposition nord-est”