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Anjani Trivedi

China Banks’ Latest Bailout: Where’s the Equity?

Beijing knows that small lenders are getting crushed. The latest move to prop them up seems as makeshift as the rest.

Killing time after authorities seized control of Baoshang Bank Co. last year.

Killing time after authorities seized control of Baoshang Bank Co. last year.

Photographer: Bloomberg

From the looks of it, Beijing is effectively attempting to inject equity into its small and medium banks. That may help keep them alive, but won’t do what regulators need from these institutions — to support the coming wave of defaults, bankruptcies, and a weakening economy across China’s corporate sector and households.

China’s State Council said last week it would allow local governments to use their so-called special-purpose bonds to help replenish the weakest link in the financial system – capital buffers among regional lenders, which are operating in a more precarious environment than the country's large banks.