China’s regional banks are poised on a tightrope. Risks to the country’s banking system are rising. Some smaller lenders are likely to collapse. But the latest warnings of a crisis in the banking system from bearish westerners are overdone.
As the economy has slowed, the financial system has wobbled. At the same time, Beijing has tightened loan regulations and cracked down on shadow banking and opaque shareholding structures. The pinch has been felt by smaller, regional lenders. The government’s takeover of Baoshang Bank in May was the first such move in 18 years. The country’s biggest bank and China’s sovereign wealth fund have since bailed out two others. More failures are likely. This week, the head of China’s central bank warned that some regional lenders had “overstretched” themselves.
But China’s three biggest banks are resilient. State-owned Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China have structural advantages. They use their vast branch networks to take customer deposits. They get a much higher percentage of total profit from interest income than global peers.