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Small-bank risks manageable after Baoshang takeover: China

The seizure on May 24 rattled Chinese markets, prompting the central bank to inject cash into the banking system

Beijing

CHINA'S banking regulator said risks at small- and mid-sized banks are manageable, a central bank publication reported on Sunday, in the latest move to soothe investors' concerns after the government took over a troubled regional lender last month.

The China Banking and Insurance Regulatory Commission (CBIRC) took control of Inner Mongolia's Baoshang Bank due to "serious" credit risks on May 24, rattling Chinese markets and prompting the People's Bank of China (PBOC) to inject cash into the banking system.

While authorities said it was a standalone case, the seizure came as Beijing is urging banks to boost lending to help cushion an economic slowdown, fuelling concerns about rising debt and more bad loans.

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"At present, small- and mid-sized banks are operating smoothly, liquidity is relatively ample, and overall risks are fully manageable," the CBIRC said in a Q&A interview with the Financial News.

The regulator also said big banks are willing to continue interbank business with small banks to safeguard the stability of financial markets. Some small banks rely heavily on short-term borrowing from the interbank market, leaving other banks at risk if they run into trouble.

A Reuters analysis showed at least 18 smaller institutions have not published up-to-date financial reports, and in some of those cases, senior regulatory officials have been appointed for bank management oversight.

The CBIRC in the interview sought to allay concerns about such practices, saying some of the banks that have been unable to complete audits were in the midst of equity restructuring, some were preparing to go public and some had changed auditors.

Those cases have been reported to the regulator, the CBIRC said.

In particular, Shandong-based Hengfeng Bank, which is in the midst of a restructuring spearheaded by Shandong province, was singled out by CBIRC on Sunday amid market speculation of further consolidation moves after Baoshang's takeover. The bank has not released its annual report yet.

The CBIRC said liquidity at Hengfeng is ample and the bank is operating normally, while adding that authorities will continue to guide Hengfeng to improve its risk controls and compliance.

The CBIRC also said it will hire accounting, law and asset appraisal firms in the next step to re-evaluate Baoshang's assets and liabilities.

It said regulators have reached repayment agreements with large depositors at the bank.

The takeover of Baoshang was due to the improper and illegal use of significant bank funds by Tomorrow Holdings that holds 89 per cent of Baoshang's shares, according to the PBOC.

The CBIRC said on Sunday that the group has voluntarily transferred its stakes in over 10 financial institutions, including Bank of Langfang and Taian Bank, to new investors, and that risks associated with Tomorrow Holdings have been contained.

Other financial institutions, including listed Harbin Bank, that the group has a stake in are operating smoothly, said the CBIRC.

Tomorrow has been in the process of divesting some assets since its chairman Xiao Jianhua was investigated more than two years ago amid a government crackdown on systemic risks posed by financial conglomerates. The billionaire has not been seen since 2017. REUTERS