China Allocates $142 Billion to Major Banks: Is Beijing Facing a Deepening Crisis?

“`html

China Stimulus Fuels Asian Markets Amid Economic Recovery Hopes

China’s recent actions have significantly impacted Asian stock markets, igniting fresh optimism regarding its economic recovery, which is closely monitored by global investors.

According to reports from Bloomberg, Beijing is contemplating a massive injection of up to 1 trillion yuan (approximately 142 billion dollars) into its major state-owned banks.
This strategic move aims to bolster their capacity to support a struggling economy.

This initiative adds to the broader stimulus measures introduced by China this week to further stimulate fragile growth and stagnant markets.
The major banks in the world’s second-largest economy are grappling with declining margins, reduced profits, and increasing non-performing loans amid a slowing growth rate and an unprecedented real estate crisis.

In fact, four out of the five largest Chinese banks reported a decrease in profits during the second quarter, as they struggled to comply with government pressure to lower lending rates in an effort to boost faltering demand.

Implications of the 1 Trillion Yuan Injection

The proposed funding for banks is expected to be primarily facilitated through the issuance of new special government bonds, with detailed plans yet to be finalized and subject to change.
If this operation is confirmed, it would mark the first time since the global financial crisis in 2008 that Beijing injects capital into its major banks.

Despite the top six banks possessing capital levels significantly above regulatory requirements, there is a sense of urgency in replenishing credit institutions.
Banks such as Industrial & Commercial Bank of China Ltd.
and Bank of China Ltd.
are currently facing challenges including low margins and a rise in bad debts.

Francis Chan, a senior analyst at Bloomberg Intelligence, noted, “In theory, large banks do not require additional capital to sustain operations unless asked to assume greater credit risks.” He added that 1 trillion yuan would adequately address such needs.

Regulatory Pressure and Market Impact

Chinese mega-banks have encountered increasing pressure from regulatory bodies to support the faltering economy by providing affordable loans to high-risk borrowers, including real estate developers and local government financing vehicles facing liquidity shortages.
More recently, some banks responded to government demands by prioritizing dividend payments to bolster the stock market, even though profit growth and margins are declining.

Interestingly, cumulative profits for Chinese commercial lenders increased by only 0.4% in the first half of the year, the slowest pace since 2020.
Concurrently, the sector’s net interest margins have continued to diminish, dropping to a historic low of 1.54% by the end of June, which is significantly below the 1.8% threshold deemed necessary for reasonable profitability.

Challenges of Dividend Distribution

Furthermore, the greater distribution of dividends poses a risk of eroding the capital buffers of systemically important banks that must meet additional capital requirements.
The six largest banks, including Agricultural Bank of China Ltd.
and China Construction Bank Corp., have predominantly relied on retained earnings to boost their capital reserves.

Analysts highlight that this intervention by Beijing is not unprecedented, as the majority of these banks remain state-owned.
China first bailed out its four major banks in the late 1990s when non-performing loans reached about 40%.
Policymakers then obtained special bonds to collect capital and established state-run bad banks to acquire 1.4 trillion yuan of non-performing loans at face value.
This initiative proved largely successful, paving the way for over a decade of rapid growth that established China as the world’s second-largest economy, enabling many of its largest firms to access global capital markets.

“`