China debt: Baoshang bailout rattles lenders
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China debt: Baoshang bailout rattles lenders

The move prompts questions about which other banks could be at risk, and forces the central bank to guarantee Bank of Jinzhou’s issuance of short-term debt.

By Rebecca Feng

The People’s Bank of China (PBoC) and the China Banking and Insurance Regulatory Commission (CBIRC) placed Baoshang Bank, a medium-sized regional bank in Inner Mongolia, under the control of China Construction Bank, one of the country’s four megabanks, on May 24.

The PBoC says the bank has “serious credit risk” and pledged to guarantee all retail deposits, no matter how large. Repayments of institutional deposits and interbank liabilities larger than Rmb50 million ($7.2 million) are up for negotiation.

Ting Lu_160x186

Ting Lu, Nomura

The move appears to be the natural consequence of leverage building up in China’s financial system, despite efforts by the government to reduce borrowing by banks and corporations. Many offshore bankers told Asiamoney they thought the bailout was a one-off, but the impact on the debt markets was noticeable immediately.

China’s big banks have become extremely reticent about buying negotiable certificate of deposits (or NCDs), on which Chinese small and medium-sized banks depend heavily for refinancing.

Smaller banks cancelled their issuance plans in the week after Baoshang’s bailout. As for double-A rated banks, they issued just 8.4% of their target in the week after the takeover, compared with 56.7%

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