China’s biggest bank has stepped in to become the largest shareholder of a troubled Hong Kong-listed lender, the latest sign that the state is increasing its financial support for struggling banks across the country.
Industrial and Commercial Bank of China said on Sunday that one of its subsidiaries would invest up to Rmb3bn ($436m) in Bank of Jinzhou, taking a stake of about 10.82 per cent.
Investors have grown concerned over the health of the Chinese banking system in recent weeks following the government takeover of Baoshang Bank, the first such incident in nearly two decades.
Large state institutions are often expected to swoop in to save troubled companies or banks if it is feared they present a larger risk to the financial system. ICBC said in a statement on Sunday that the investment in Jinzhou was intended to serve “national supply-side reform”.
The bailout of Baoshang, which was once controlled by kidnapped tycoon Xiao Jianhua, has left investors and money market traders questioning whether more troubled lenders, such as Jinzhou, would receive similar treatment.
“Talks of potential restructuring of Bank of Jinzhou has reignited contagion fears and concerns about the health of China’s financial system,” Barclays analysts said in a note to investors on Friday, before the ICBC investment was announced.
Based in China’s northeastern rust belt province of Liaoning, Bank of Jinzhou has not published 2018 annual results as required by disclosure rules in Hong Kong, where it listed in 2015.
In late May its auditor Ernst & Young Hua Ming resigned after it found that some of the bank’s loans to institutional clients were not used for their stated purpose.
A Jinzhou statement said that EY had requested evidence of “the customers’ ability to service the loans, particularly the collateral that could be enforced” — a sign the auditor was concerned about the bank’s credit quality. EY resigned when Jinzhou could not provide the evidence and disagreed on how to resolve the problem.
In mid-June regulators were forced to back Jinzhou’s interbank borrowings. At the time the People’s Bank of China gave explicit backing to a negotiable certificate of deposit from Jinzhou, an effort to help other financial institutions grow comfortable lending to it.
Bank of Jinzhou’s exposure to troubled companies has been known for several years. It lent $440m to once high-flying Chinese solar group Hanergy, which experienced a collapse in its share price in 2015. A series of investigations by the Financial Times that year into Hanergy’s business model highlighted suspicions because of its revenue coming almost entirely from sales to its parent.
Maintaining financial stability is considered a top priority among China’s leadership, who fear that disruptions in the banking system will hurt economic growth and lead to unemployment and unrest.
