Business Maverick: China’s Troubled Banks Get a Lifeline from Local Governments

At least 10 small Chinese banks have raised money this year by selling shares packaged with non-performing loans, in several cases to buyers controlled by local authorities. In at least one deal, the NPLs were sold at above-market rates.

The transactions, while modest in number given China has 3,000-plus small banks, show the determination of local authorities to shore up the linchpins of their district economies. The health of small banks has become a growing concern after the seizure of one lender in May forced losses on creditors and cast doubt on the longstanding assumption that the state would always backstop troubled banks.

The capital injections amount to “local government bailouts through cash rich state-owned enterprises,” said Alicia Garcia Herrero, chief economist for the Asia Pacific region at Natixis SA. Regulators have learned it’s better to rescue troubled banks indirectly to limit the risk of contagion, she said.

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