by billwilliam

According to Sina Finance, China downgraded the credit rating of eight medium/small banks within a short interval of three days, including four local banks in Liaoning Province: Shengjing Bank, Fuxin Bank, Huludao Bank, and Dalian Rural Commercial Bank. The credit rating agency cites five main reasons for the downgrading: nonperforming loans, poor profit, problematic asset structure, decreasing deposits, and credit risk of bank shareholders.

The article explains the five reasons in detail. First, the banks are downgraded for delinquent loan payments or loan defaults from debtors amid the economic downturn, lowering borrower credit, and the Covid pandemic. Some banks’ reserves are even lower than requirements. For example, nonperforming loans surged by 1.13 billion RMB to a total of 1.67 billion RMB at the Xinzheng Rural Commercial Bank last year. Second, poor profitability exacerbates the banks’ risk level. The Pingyao Rural Commercial Bank (a bank of 15 billion RMB in size) only made less than 1 million RMB in profit last year, a 93% drop year over year. Third, some of the banks have a flawed asset structure: most of their loans are concentrated in the hands of a few large borrowers, aggravating exposure to risk. Fourth, the banks experience a growing debt ratio as they have problems attracting new deposits. After Shengjing Bank rejected some of the high-cost or unstable deposits last year, its deposits could no longer recover to the previous level. Fifth, some of the banks’ shareholders have poor credit ratings themselves.

The downgraded banks are concentrated in Liaoning Province, whose banking sector is performing poorly. The banking sector in Liaoning (Dalian City excluded) only realized 9.6 billion RMB of net profit in 2020, a 21.9% drop year over year; the net profit in the first half of this year is only 3.9 billion RMB, a 70% drop year over year. Shengjing Bank, Fuxin Bank, and Dalian Rural Commerical saw their profits plunge by 77.9%, 95.5%, and 28.6% last year, respectively. Huludao Bank suffered a net loss.

The shareholders of these local banks are themselves embattled by huge debt. Evergrande Group, the largest shareholder with a 36.4% stake in Shengjing Bank, is plagued by bad debt and recently saw its stock price tumbling. The government of Shenyang City pledged that city-owned enterprises will purchase more shares of Shengjing Bank. All stake of Fuxin Bank’s largest shareholder is confiscated and will be auctioned soon. The second and tenth-largest shareholders of Huludao Bank also had their assets seized for breach of contract. To deal with the banking crisis, Liaoning Province decided to merge 12 local banks into a provincial commercial bank called the Liaoshen Bank. In addition to local banks, HSBC China was also downgraded by Moody’s in long-term deposits, base credit rating, long-term trade counterparty risk, and long-term forex trade counterparty risk.

China’s downgrading of eight local banks is only a window dressing that doesn’t address the root of the banking crisis. As Sina Finance reported, Shengjing Bank was only downgraded from AAA rating to AA+, but the actual risk of bank failure is much higher. According to Mr. Miles Guo, all banks in Communist China are somewhat Ponzi schemes because the Chinese Communist Party kleptocrats have embezzled most of the wealth deposited in banks. Companies controlled by kleptocrats (including HNA Group) borrowed trillions of USD in loans from banks in China and then laundered the money into the personal accounts or family trusts of the kleptocrats’ relatives abroad. Since these banks are the lenders or guarantors of these loans that the kleptocrats never plan to pay back, banks in China will bust one after another over defaulted loans or nonperforming loans, setting off a financial tsunami that will ravage the entire country and possibly global economic. The CCP government only delays the process by strict censorship and by prohibiting bank runs. Wealthy Chinese should better deposit their money in foreign banks that comply with financial regulations.