China steps up financial risk cleanup under new top regulator
This underscores authorities’ increasing efforts to contain financial risks and strengthen market discipline
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CHINA is stepping up efforts to eliminate risks in its financial sector, highlighted by moves to address troubles at two financial institutions.
The National Financial Regulatory Administration announced on Friday (Jul 3) a one-year regulatory takeover of Z-Bank and approved the bankruptcy of Zhongrong International Trust, according to separate statements.
The moves mark the first major enforcement actions under Ding Xiangqun, a veteran banking and insurance regulator who took the helm of the agency in late May.
The announcements underscore a shifting approach towards China’s US$60 trillion financial system, with authorities increasingly willing to take decisive action to contain financial risks and strengthen market discipline.
The stance comes as the nation’s financial institutions grapple with surging bad loans and record-low margins, compressed by an economy struggling to regain momentum.
Wuhan-based Z-Bank, one of China’s few privately-owned, internet-focused commercial lenders, expanded rapidly via online consumer lending.
However, the aggressive growth left the bank saddled with years of regulatory violations, weak internal controls and deteriorating asset quality.
The takeover, effective Friday, aims to protect depositors and stabilise the lender under direct state management.
The bankruptcy of Zhongrong International Trust marks the formal demise of a prominent player in China’s shadow banking sector.
Once among the nation’s largest trust firms and a core financial arm of the troubled Zhongzhi Enterprise Group, Zhongrong became a high-profile casualty of the property downturn due to its heavy exposure to real estate financing and non-standard credit assets.
The company first missed payments on wealth management products in 2023, sparking fears of a broader financial contagion.
Despite a government-arranged trusteeship and restructuring attempts, the firm failed to regain solvency, paving the way for its liquidation.
“Financial stability is no longer synonymous with keeping every troubled institution afloat,” said Liao Zhiming, an analyst at Huayuan Securities.
“Instead, authorities seem increasingly comfortable allowing weaker firms to fail, reflecting greater confidence that systemic risks can be contained and that long-standing financial vulnerabilities have been substantially reduced.”
Liao added that Z-Bank’s interbank liabilities at end-2024 were well below Baoshang Bank’s level when it was taken over in 2019, meaning the impact on the bond market will be much more limited than that of the Baoshang case.
In 2019, China’s surprise takeover of Baoshang Bank jolted markets as the government imposed losses on some creditors, upending long-held assumptions of a government backstop.
The aggressive wind-downs follow years of a behind-the-scenes cleanup.
Speaking at the Lujiazui Forum in Shanghai, Chinese Vice-Premier He Lifeng said that the number of high-risk, small and medium-sized financial institutions has plunged by more than 70 per cent from 2022 levels.
He reiterated Beijing’s hardened stance, pledging that authorities will resolutely force the exit of financial institutions that are insolvent and lack going-concern value. BLOOMBERG
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