December 11, 2024
SHENZHEN – Some private banks in China have turned to state investors for funds as an economic slowdown weighs on profitability in the sector.
In late November, Anhui Xin’an Bank, in the central Chinese province, made headlines when it became the country’s first private bank to be majority-owned by local state-funded entities.
Three months earlier, in another first, a firm backed by the local government in China’s south-east became the largest shareholder of a private lender, with a 30 per cent stake in Jiangxi Yumin Bank.
The moves come as banks in China grapple not just with the effects of a property crisis that has reverberated through the economy but also with low interest rates – part of the country’s monetary stimulus – that are squeezing lenders’ profit margins.
Mr Gary Ng, a senior economist at investment bank Natixis in Hong Kong, said: “It is increasingly difficult for private banks to survive without access to state resources and connections.”
China first opened the door to private banks in 2014 when it allowed domestic lenders fully capitalised by private funds to operate in the state-dominated financial sector.
The move was part of efforts to boost banks’ productivity and increase lending to underserved small and medium-sized enterprises.
The country now has 19 private banks – a small fraction of the financial system. Their two trillion yuan (S$370 billion) in total assets as at the end of 2023 was less than 0.5 per cent of that held by Chinese banks, of which the main players are state-owned entities such as the Industrial and Commercial Bank of China.
The largest private banks are digital lenders WeBank and MYbank, which are backed by tech giants Tencent and Ant Group, respectively. Both saw their profits grow at about 20 per cent in 2023, although the figure for MYbank fell in the first three quarters of 2024.
On the other end of the spectrum are small regional lenders struggling with their balance sheets. At least four private banks reported a fall in net profits in 2023, data compiled by local media shows.
Anhui Xin’an Bank – now majority-owned by a trio of state-backed companies – saw its net profits plunge more than 70 per cent in 2023. Its total assets, valued at 19.3 billion yuan, contracted by more than 8 per cent from 2022.
Jiangxi Yumin Bank – now 30 per cent held by a state-funded entity – recorded a 19 per cent fall in net profits in 2022 and reported losses in the first three quarters of 2023.
Before its ownership changed hands, the bank’s largest shareholder – a hog supplier – had also been troubled by debt.
Explaining the move towards state capital, economist Dong Ximiao said that amid an economic downturn, some underperforming private banks may not have been able to find suitable private investors.
Obtaining a stake in a bank would entail a high capital outlay, restrictions on the sale of shares and strict prerequisites that have further tightened in recent years, said the chief researcher at Merchants Union Consumer Finance, a financial services firm headquartered in Shenzhen.
Analysts say that while banks in China as a whole are facing headwinds, the pressures that small and private lenders contend with are more acute.
Profitability has fallen, especially for private banks which lack market scale, are less diversified and face higher borrowing costs than their larger rivals, said Dr Lu Lerong of King’s College London.
“If the current economic environment persists, it is likely that private banks will be less profitable or even loss-making,” said the expert in financial law, who has written about private lending in China.
That the authorities allowed state capital injections into private banks is indicative of their concerns about financial stability – in particular, potential spillovers that could be triggered by private banks faltering, said Dr Dong Jinyue, principal economist at BBVA Research in Hong Kong.
With the state funds, the lenders can expand their business and strengthen earnings, she added.
Mr Ng said: “We will likely see more private banks introducing state capital in the coming years.” He added that the likelihood would be higher if the banks’ original shareholders faced financial difficulties.
China has also seen an uptick in its ongoing consolidation of rural financial institutions, which comprise thousands of small lenders in villages and townships that make up 13 per cent of the country’s banking assets.
The common thread between this consolidation and state capital in private banks is that both are ways of defusing financial risks.
More than 260 rural financial institutions – seen to face higher credit risks – were merged into larger entities in 2024, state media outlet China Daily reported.
By pooling these entities and their resources, regulators are hoping to make them more resilient to economic shocks.