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Opinion
Anjani Trivedi and Shuli Ren

China’s Failing Small Banks Are Becoming a Big Problem

With its ad hoc rescues and bailouts of regional lenders, the country’s central bank risks fueling a larger financial crisis.

The East is Red ink.

The East is Red ink.

Photographer: Giulia Marchi/Bloomberg via Getty Images

As Chinese official slogans go, “one bank, one policy” may lack the revolutionary fervor of “let a hundred flowers bloom” or “smash the four olds.” But don’t be fooled by the bureaucratic banality of this mantra recently adopted by China’s banking regulator. Its patchwork one-bank, one-policy approach to a cascade of regional bank failures could trigger a wider financial crisis in the world’s second largest economy.

Across China, Beijing has willy-nilly injected capital into failing lenders, forced state-owned enterprises to step in as shareholders and consolidated yet more institutions in a bid to stave off system-wide contagion. Last month, regulators approved the recapitalization of Zhejiang-based Bank of Wenzhou using special infrastructure financing bonds. Plans are afoot to merge two ailing city banks to create Sichuan Bank Co., which will become China’s largest municipal commercial bank with 30 billion yuan of capital ($3.75 billion). Since May 2019, which saw China’s first bank seizure in decades, there has been a wave of other mergers among small provincial lenders, with officials maneuvering behind the scenes in order to avoid stirring panic. Other lenders have been restructured and reorganized. Meanwhile, regulators are allowing unlisted, small lenders — regardless of their financial position — to raise equity capital via private placements.