China is gradually clarifying its bank bailout message. Two months after officials seized one regional lender, government-controlled financial institutions are now taking stakes in Bank of Jinzhou, which holds a roughly $100 billion balance sheet. Mixed signals plagued the last round and destabilised local markets. The trick with this rescue will be sending a signal that keeps investors a bit nervous.
The country’s state-backed financiers pounced into Bank of Jinzhou over the weekend, following reports last week that central bank officials and other regulators met with financial institutions in Liaoning province, where the lender is based. It has been in the spotlight since trading of its shares on the Hong Kong stock exchange was suspended in April, after the bank said publication of last year’s annual results would be delayed. The company’s auditor, EY, quit after it could not agree with the bank on the description of some loans.
Industrial and Commercial Bank of China, the country’s largest bank by assets, said on Sunday it would invest up to 3 billion yuan ($436 million) into Bank of Jinzhou. Two state-owned “bad banks” – China Cinda Asset Management and China Great Wall Asset Management – will also take stakes.
So far the market reaction has been measured. That contrasts sharply with the panic that ensued when the government unexpectedly seized Baoshang Bank, a smallish Inner Mongolia-based lender, in late May. Officials threatened to impose a haircut on some of the biggest creditors, marking a default on China’s “implicit guarantee”, the widespread investor assumption that Beijing stands behind banks, no matter how rickety. After local media reported the shave could be as high as 30%, short-term funding rates spiked as financial institutions reassessed their exposure to smaller lenders.
Officials calmed markets by saying the Baoshang takeover was a one-off event, stressing the minimal scope of the haircuts and issuing an unusual form of protection for Bank of Jinzhou’s creditors. But the People’s Bank of China doesn’t want investors to assume China’s legions of troubled municipal banks are safe bets any more. At a press conference earlier this month, central bank officials were unapologetic about their pounce on Baoshang: the haircut was no accident, they implied, and they don’t want financing for risky banks to return to pre-takeover levels. With Bank of Jinzhou, the challenge will be to save the bank without softening this harder line.