40 Banks Shut Down in Sudden ‘Vanishing Act’ – Absorbed Into Larger Lenders As Economy Teeters in China: Report

Banks are collapsing at an unprecedented rate in China due to a major downturn in the country’s property market, poor risk controls and other issues.

In the week ending on June 24th, 40 smaller banks were sucked up by larger institutions, a vanishing act incomparable even to the savings and loan crisis of the 1980’s and 90’s, reports The Economist.

The report tracks roughly 3,800 lenders in rural China that hold a whopping $7.5 trillion in assets, or 13% of the entire banking system, that are starting to bleed out due to an overstock of bad loans. Some of them have admitted that as much as 40% of their portfolios are non-performing loans.

Thirty-six of the 40 failed institutions were all absorbed into one giant lender: Liaoning Rural Commercial Bank, which was set up by regulators in September to manage bad banks.

According to the Economist, five similar institutions have been created in the last 10 months for the same purpose of absorbing small bad banks – which critics warn will only lead to “bigger, badder” banks.

At the same time, the Chinese economy has shown multiple signs of hitting a wall in the last year, including sharp downturns in residential construction and sales, consumer confidence and consumer prices, combined with a declining population and soaring debt as a percentage of GDP.

But as China’s economy struggles at the local level, its biggest banks continue to flourish, consolidating the fallen institutions while drastically expanding their market cap.

According to S&P Global, Industrial and Commercial Bank of China Ltd. (ICBC), the largest bank in China, maintained its position as the largest bank in the Asia Pacific region in Q2 of 2024, while China Construction Bank Corp, the second largest bank in China, saw the greatest market cap expansion of the quarter as it rose 21.4%.

S&P Global also reports that “the weak may get weaker,” with smaller institutions likely to be the most vulnerable to an expected “prolonged property downcycle,” and a government more selective on who it wants to save.

“Rural banks on average had the highest NPL ratio, lowest profitability, and weakest capital and provision coverage buffers at end-2023…

More financial institutions could fall into trouble over the next two to three years. The bankruptcies of two rural banks in Liaoning province 2022 is a sign that government support is becoming more selective. That said, any reduction in support to poorly managed financial institutions could be gradual, given the system has many weak small banks.”

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