UPDATED – PBOC, CBIRC Take Control of Inner Mongolia Bank

The PBOC and CBIRC have said they are taking control of Baoshang Bank, a small privately-owned bank whose owner disappeared two years ago.

28 May 2019 – coverage from Reuters BreakingViews

The PBOC (People’s Bank of China) and CBIRC (China Banking and Insurance Regulatory Commission) are assuming control of a small privately-owned bank, following the disappearance of its owner and billionaire financier Xiao Jianhua from a Hong Kong hotel two years ago.

The regulators will assume control of Baoshang Bank for a period of one year, saying the Inner Mongolia-based joint-stock commercial bank is exposed to “serious credit risks”.

The bank’s key stakeholder, Tomorrow Holdings, founded by billionaire Xiao, has already been targeted in a government crackdown on systemic risks. The company’s assets are reportedly being sold off.

A Caixin report said Tomorrow Holdings owns at least a 70 percent stake in Baoshang Bank through its various subsidiaries. The bank is a key component of Xiao’s sprawling business empire. Although it is a small lender based in the industrial city of Baotou in the Inner Mongolia Autonomous Region, the bank is considered to have a particularly close relationship with Tomorrow Holdings.

Zhou Xuedong, chair of the PBOC’s general office, and Li Guorong, the deputy head of the CBIRC’s commercial bank department, will lead the takeover team. In a joint statement, the two regulators said the move is in line with laws to protect the legitimate rights of depositors and other clients.

Baoshang Bank has a network of 291 outlets with more than 8,000 employees on staff, total assets of CNY 418.3 billion (USD 60.6 billion), and a CNY 144.8 billion loan balance of at end-2016.

The bank is also highly indebted, owing CNY 156.5 billion at end-2016, a 65% increase from two years earlier.

According to Reuters, the PBOC will offer liquidity to Baoshang Bank “to ensure that the bank’s payment system is operating smoothly”. It will also start to give more policy support to improve small- and mid-sized banks’ corporate governance.

CCB (China Construction Bank), the country’s best capitalised lender, will be entrusted with handling Baoshang’s daily operations, and business will continue as usual after the takeover, the regulators said.

CCB could ultimately be forced to take Baoshang over, Reuters BreakingViews says. “Yet CCB and its peers would probably prefer to pick up nimble, fintech-savvy regional lenders in vigorous provinces, not charity cases from the interior.”

Though the takeover of Baoshang is the first by Chinese regulators in nearly twenty years, rural lenders in China represent an outsize share of the country’s financial risk, and it is not uncommon for them to cover up non-performing assets to hide balance sheet weakness.

“In 2018, Shanghai’s Pudong Development Bank was fined for using 1,493 shell companies to hide non-performing loans. Other lenders, like Bank of Dalian, have been bailed out repeatedly,” BreakingViews said.

It also noted that Baoshang was just one of a trio of lenders named by UBS analyst Jason Bedford as having Tier 1 capital adequacy ratios below 8 percent, the lowest in his 2018 national survey.

 

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