China’s Shifting Approach to Bank Bailouts

China’s legions of regional banks are under strain. The country’s two-year crackdown on risky financing and the trade war with the U.S. have slowed economic growth, triggering debt defaults that are exposing them as the weakest link in the credit chain. Several lenders have fallen into deep trouble this year, with others -- perhaps many -- expected to follow: More than 13% of all banks were deemed “high risk” in 2019. What’s different is that China seems to have thrown out the old playbook of injecting state funds into struggling lenders to keep them alive, representing another shift for the nation toward more market-oriented practices.

Not quite. They’re being rescued but investors are having to bear some of the brunt. It started in May with the surprise government takeover of Baoshang Bank Co. -- China’s first bank seizure in more than 20 years. The Inner Mongolia-based lender, once seen as a model for funding regional economies, was one of the myriad smaller banks where shadow-financing techniques obscured their exposure to risky borrowers. The authorities cited “serious credit risks.” Two months later came another approach: the purchase of stakes in struggling Bank of Jinzhou Co. by three state-owned heavyweight firms. Shandong province’s government will become the largest shareholder in troubled Hengfeng Bank Co., local media reported in August.