China's provincial governments will back local banking champions. Anxious economists in Beijing may want to rein in risk-hungry banks, but regional officials want to keep them afloat, as bad loans mount and capital buffers erode.
Industrial Bank Co, a mid-tier lender based in Fujian Province, is the first in what is likely to be a line of banks hitting up backers for capital. In late July the bank announced plans to raise $3.9 billion from six friendly shareholders, including the Department of Finance in Fujian and State-owned China Tobacco.
Industrial Bank is in search of more money because it - and other peers - are getting squeezed. China's "Big Five" State-owned banks hog access to the borrowers with the best collateral and cleanest books. That leaves the rest of the industry squabbling for scraps, lending to riskier borrowers and indulging heavily in shadow banking.
There are two problems: first, the private sector is borrowing less. Second, officials want to discourage smaller banks from issuing high-yielding wealth management products. That is likely to suppress the one business area where banks like Industrial can compete with the big boys on relatively flat ground.
The fresh capital is welcome. Like other aggressive regional banks, Industrial is one of the weak links in China's financial system. It had a core Tier 1 capital ratio of just 9.2 percent at end-2015, according to its annual report. That is well below the industry average of 12.6 percent, Thomson Reuters data shows.
Moreover, as with peers like Zheshang Bank and Bank of Jinzhou, interbank deposits make up more than 40 percent of Industrial Bank's deposit base, according to Gavekal Dragonomics research. This reliance on other banks could leave medium-sized lenders vulnerable to a liquidity crunch if peers started to question asset quality.
In any case, though, Fujian needs banks it can use to prop up wobbly local employers. Thus, government-linked investors are riding to the rescue. The same goes for other embattled provinces struggling to downsize sunset industries without causing mass unemployment. Smaller banks may have ugly books, but if governments need them to keep throwing good money after bad, they will have to keep recapitalizing them.
The author is Rachel Morarjee, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews.
