The Chinese government has integrated hundreds of local banks to launch large banks in order to liquidate the enormous risk of bad loans at once.
Since 2022, the merger of cooperatives and commercial banks has been carried out in at least seven regions. This year, $6.7 trillion in banking sector risk resolution was cited as a top priority, and another integration is underway nationwide.
Founded in the early 1950s, the Chinese cooperative began as an institution that funded farmers and became a commercial bank. Profits were low as a result of doing loan business in underdeveloped areas, and the quality of assets deteriorated. Due to lax internal control, it quickly became insolvent, such as being reduced to a ‘cash machine’ for major shareholders.
Since then, it has been struggling for years due to the sluggish real estate market and a weak economy. The ratio of bad loans to 2100 banks under the local cooperative system reached 3.48% as of the end of 2022. This is more than twice as high as all banks. Accordingly, the Chinese government began integrating cooperatives in 2022 and converted 25 cooperatives established in the early 2000s into modern financial companies. By June last year, the number of high-risk lenders in China decreased to 337, but 96% of them were still local cooperatives and commercial banks.
The Chinese government’s rush to consolidate and close local banks also contributed to the judgment that such risks could lead to political turmoil. In 2022, billions of dollars of fraud occurred in various local banks in Henan Province, when hundreds of people protested to return their deposits.
However, even if these local banks merge, it will not create a more solid financial institution, Bloomberg said. In the case of Liaoshen Bank, which was established in 2021 by absorbing 12 institutions, the ratio of bad loans as of the end of 2022 was 4.67%, higher than the average (1.85%) of commercial banks.
EJ SONG
US ASIA JOURNAL
