China’s banking regulator has warned of the precarious health of regional lenders as well as a resurgence of high-risk shadow banking activity in the wake of the COVID-19 outbreak.
In a statement released on 11 July via its official website CBIRC said that “a number of small and medium-sized financial institutions suffer from comparatively severe problems.
“Some banks, insurers and trust companies are manipulated by major shareholders or controlled by internal personnel, and corporate governance mechanisms have lost their effectiveness.
“Balance sheet foundations were originally quite weak, and a worsening of asset quality is accelerating under the shock of the pandemic, while risk is continually accumulating.”
In addition to problems with regional lenders, CBIRC highlighted a resurgence in shadow banking activity that will exacerbate risk.
“A number of high-risk shadow banking activities have returned from the dead – some of them are using new forms and guises in an attempt to return.
“The leverage ratios of enterprises and households is increasing, and some funds are flowing into the real estate and share markets illicitly, driving asset bubbles.
“Illegal and illicit activity is occurring at times – such as the Wuhan Jinfeng fake gold incident that was gradually revealed starting in January 2020, and involved multiple banks, insurers and trust companies.”
CBIRC also warned of a rise in non-performing loans (NPL), pointing to “greater upwards pressure on non-performing loans,” as well as the need for “effective preparations for a possible large-scale rebound in NPL’s.”
As of the end of June the NPL balance was 3.6 trillion yuan, for an increase of 400.4 billion yuan compared to the start of the year.
The NPL ratio was 2.10%, for a rise of 0.08 percentage points compared to the start of 2020.