Regions Will Shore Up China’s Smaller Banks

China’s regions will back local banking champions. Anxious economists in Beijing may want to rein in risk-hungry local banks, but provincial officials have every reason to keep them afloat, as bad loans mount and capital buffers erode. Industrial Bank, a mid-tier lender based in Fujian province, is the first of what is likely to be a queue of banks hitting up backers for capital. On July 29 it announced plans to raise $3.9 billion from six friendly shareholders, including its provincial Department of Finance and centrally owned China Tobacco. Industrial needs more money because it – and peers – are getting squeezed. China’s “Big Five” state-owned banks hog access to the borrowers with the best collateral and cleanest books. That leaves the also-rans squabbling for scraps, lending to riskier borrowers and indulging heavily in shadow banking. There are two problems: first, the private sector is borrowing less. Second, officials want to discourage smaller banks from issuing high-yielding “wealth management products”. That looks likely to suppress the one business line where banks like Industrial could compete with the big boys on relatively flat ground.

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