Property crisis pushes China to increase financial risk monitoring, asset disposal for troubled small banks

China is currently grappling with a property crisis, largely triggered by the struggles of major companies Evergrande and Country Garden. This crisis is posing a significant threat to the financial stability of small banks within the country. In response, the Chinese government has pledged to increase its risk monitoring and assist these banks in disposing of bad assets and loans. They also plan to replenish their capital through various channels. However, to prevent the risk from spreading, these banks have been restricted from operating outside their designated regions. The government's goal over the next five years is to establish a high-quality inclusive financial system. This system aims to provide more funding for small market entities and agricultural sectors, despite their high levels of bad loans and fundraising costs. After enjoying a decade of rapid growth backed by government stimulus, China's regional banks have become financial burdens for local governments. They have also been tarnished by allegations of corruption and excessive risk. The coronavirus pandemic has further exacerbated the situation, revealing numerous bad loans. These small lenders are often closely connected to local governments and have significant exposure to the volatile real estate sector. This makes them more susceptible to economic downturns than China's larger banks. The average non-performing loan ratio is higher for these small banks compared to commercial banks. There have been several scandals involving these small banks in recent years. For instance, in 2022, savers in the central province of Henan protested after being denied access to their accounts. Rumors also spread that the Bank of Cangzhou had lent a large amount to crisis-ridden real estate firm Evergrande, causing a bank run. To aid these struggling banks, local governments have increased the issuance of special-purpose bonds. The central government has also stepped up efforts to regulate the behavior of major shareholders of these banks, pledging to crackdown on illegal financial activities. Specific reform plans will be customized for each province to resolve risks for small banks. The government also plans to improve the quality of inclusive financial products and services, and support the sustainable development of small and micro business entities, rural revitalisation and green and low-carbon development. They aim to develop agricultural insurance, commercial pension insurance and health insurance products to support agricultural production, pension needs and basic livelihood security. The government believes that promoting rural revitalisation is crucial in building a strong agricultural country in the new era, and more financial resources must be allocated to the agricultural sector.