Smaller Banks Overleveraged, Excessively Reliant on Wholesale Borrowing: PBOC


One the Chinese central bank’s senior-most officials says that many of the country’s small and medium-sized lenders are over leveraged and suffer from an excessive reliance upon wholesale borrowing. 

Zhang Xiaohui (张晓慧), vice-governor of the People’s Bank of China, notes in an essay recently published by China Finance magazine (中国金融) that the upcoming macro prudential assessment will put heavy pressure on a number of small and medium-sized banks who have engaged in reckless asset expansion and use of leverage.

“During the process of controlling leverage and expediting the withdrawal of capital from the ’empty’ an directing it towards the ‘real,’ some institutions that have recently increased leverage will naturally feel pressured,” said Zhang in the essay entitled “An Exploration of Macro-prudential Policy in China” (宏观审慎政策在中国的探索).

According to Zhang a number of small and medium-sized financial institutions have “excessively pursued profits and excessively increased leverage, leading to an asset expansion rate far in excess of their capital bearing capacity.”

Zhang cites data indicating that as of the end of March 2017 25.9% of municipal banks increased their loans at a rate of 25% which is approximately two times the national average. 14.2% of rural banks saw loan expansion of over 25% during the same period, while the figure for rural credit unions was 14.5%.

182 municipal banks, rural banks and rural credit unions saw loan growth in excess of 35%, accounting for 7.9% of all lenders in these categories.


Despite increasing liquidity scarcity caused by the deleveraging drive launched by China’s financial regulators, many smaller lenders have ambitious plans to increase their assets this year.

According to some reports certain municipal lenders with assets in excess of 500 billion yuan plan on growing loans in 2017 as as much as 60- 70%, while many smaller financial institutions are expanding assets far faster than debt bearing capabilities, and rely excessively on wholesale debt.

Zhang expects the MPA to place heavy pressure on these institutions who are expanding assets with excessive rapidity and maintaining high leverage levels or increasing leverage in an imprudent manner.

While many financial institutions complain about capital scarcity and market disruption caused by MPA’s, Zhang emphasised the vital  role of MPA’s in the suppression of asset bubbles, deleveraging and risk prevention.

She noted that MPA’s “are not the source of market fluctuations, but precisely the opposite.

“They are of benefit to reminding financial institutions that comprehensively strengthening risk management, and stabilisation and control of leverage levels, are powerful tools for preventing systemic financial risk.”