China Sees Launch of New Regional Bank in Hunan Province Following China Huarong’s Bond Woes

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The Hunan province capital of Changsha has just seen the launch of China’s latest regional lender, as the provincial banking sector continues to undergo restructuring and regulators seek to quell the aftermath of a risk scandal involving one of the country’s big four asset management companies.

Bank of Hunan Co., Ltd. held its official launch and sign unveiling ceremony on 15 February in the Hunan capital of Changsha.

The predecessor of Bank of Hunan was Huarong Xiangjiang Bank (华融湘江银行), in which China Huarong, one of China’s big four AMCs, held a 40% equity stake.

In April 2021 China Huarong saw its offshore US dollar bonds plunge in value following its failure to release its 2020 financial results before an end-of-March deadline. The move prompted Chinese regulators to push for domestic lenders to provide credit to China Huarong, in order to stem any market contagion.

In the wake of the drop in China Huarong’s bonds, Hunan’s State-owned Assets Commission also acquired 20% of equity in Huarong Xiangjiang Bank, as regulators demanded that China Huarong gradually withdraw from its non-primary operations.

According to state-owned media, the change in equity and the restructuring of Huarong Xiangjiang Bank has led to the creation of the first proving-level municipal commercial bank in Hunan province.

The move comes amidst a wave of restructurings and mergers in China’s regional banking sector over the past several years, due to concerns over risk in relation to lenders that are improperly managed or subject to poor corporate governance.

The chairman of a municipal commercial bank who has led restructuring and mergers in the sector said to 21st Century Business Herald that small and medium-sized banks in China face two major problems in the form of either inherent and acquired deficiencies.

“The former refers to small and medium-sized banks with relatively weak capital strength, weak profitability, and insufficient risk resistance capability.

“The latter refers to the existence of various factors that lead to inadequate supervision of small and medium-sized banks, which leads to insider control, key shareholder control, and local government intervention.

“Consequently, the merger of municipal commercial banks is a necessity, which can not only improve the ability to resist risks, but can also enhance the overall strength of the provincial financial system.

“To a significant extent, the task of de-risking municipal commercial banks falls on local governments and municipal commercial banks themselves, and mergers and structuring have become the primary option for municipal commercial banks to reform and eliminate risk.

“This was the case in the 1990s, during the first 10 years of this century, and over the past three years.”