Recently, the provision of financial support by state-owned banks to specific regions has garnered widespread attention across various sectors in China. This has raised concerns in the market about whether it signifies the country's initiation of measures to bolster local economic stability and mitigate risks, and whether this practice will be expanded. There are also questions of its potential effects, and what risks could arise.
Earlier, there were rumors circulating that state-owned banks planned to offer long-term, low-interest loans lasting up to 25 years to certain highly indebted and high-risk local government financing platforms. The objective behind this was to address the impending threat of undisclosed local debts. Additionally, it was speculated that preferential policies, such as exemptions for interest and principal repayments, would be implemented during the initial years of the loan. These rumors stirred considerable attention and apprehension in the market.
The concern stems from the fact that if state-owned banks, which heavily rely on deposits from businesses and individuals, commence providing low-cost loans to problematic local financing platforms, this could very well transfer the risks associated with these platforms to the state-owned banking system. Should the credit foundation of the state-owned financial system become compromised, it would expose the Chinese financial system to substantial risks, directly impacting the savings of the general public and businesses.
When considering the correlation between the two events discussed, ANBOUND researchers emphasize the importance of following the principle of information analysis. They underscore the need to gather accurate and precise information, clarify any uncertainties, and utilize this factual basis for conducting thorough analysis and forming informed judgments.
Based on the information publicly available, it can be confirmed that reports regarding state-owned banks providing financial support to local regions are indeed substantiated.
According to Phoenix New Media's report, on June 25, 2023, China Construction Bank (CCB) and the government of Hebei Province signed a strategic cooperation agreement in Beijing, where CCB will provide the province with a minimum of RMB 2 trillion of intended financial support within three years. The focus of the funding is on areas such as the coordinated development of Beijing-Tianjin-Hebei region, the construction of Xiong'an New Area, post-Olympic economic development, urban modern infrastructure construction, the development of a higher-level public service system, county-level economic development, the development of small and micro enterprises, and the transformation towards green and low-carbon and stability of foreign investment and foreign trade.
China Securities Journal also reported that, on July 3, 2023, the Bank of China (BOC) entered into a comprehensive cooperation agreement with the government of Henan Province. The agreement entails the BOC offering a range of financial services in sectors such as infrastructure, industrial transformation and upgrading, urban development, livelihood security, and social undertakings. Over the next five years, the bank will provide a total of RMB 1 trillion in intended financial support, denominated in both local and foreign currencies, to bolster the region's economic and social development.
From this information, it becomes apparent that the agreements signed by state-owned banks with specific regions for financial support differ from the earlier rumors of "directly providing long-term loans to local financing platforms". The state-owned banks consolidate credit support across various areas to form a substantial financial support package for regional advancement. These actions align with the normal business operations of state-owned banks in local regions and fulfill their political obligations of stabilizing the economy and supporting local progress. Based on publicly available information, the financial support provided by state-owned banks predominantly focuses on significant local projects and investments, with an emphasis on achieving short-term effectiveness.
Although the approach of providing financial support to local development by state-owned banks differs from directly granting long-term loans to local financing platforms, ANBOUND researchers believe that both methods share a common objective of offering financial support to ensure the stability of local developments. This helps prevent liquidity shortages and disruptions in the credit chain. Given the current economic situation in China, such financial support plays a crucial role in sustaining local economies.
Considering the prevailing conditions, it is anticipated that state-owned banks will intensify their support for local economies, marking a future trend. This suggests that more state-owned commercial banks will engage in local developments, encompassing not only entirely market-oriented operations but also a substantial number of "non-market" activities. However, ANBOUND researchers highlight two significant concerns related to this type of financial support. Firstly, the financial operations of state-owned commercial banks are increasingly resembling those of policy banks, as the demand for government-led local assistance rises and the ties between local governments and state-owned commercial banks strengthen. Secondly, since these financial operations are closely linked to local projects, there is a potential for numerous ineffective investments and a significant increase in non-performing loans.
The primary reason for state-owned commercial banks to increase their support for local development is to address short-term emergencies and avoid significant regional collapses, social risks, and financial risks in local economies and social development. For example, in recent years, Henan Province has faced various development challenges, including financial institution defaults and increased financial risk. Additionally, in 2021, the province experienced severe flooding, resulting in significant economic losses. Stabilizing the economy of Henan Province is crucial to prevent potentially serious consequences for the central region.
Can a variety of assistance measures focused on local regions effectively alleviate the complex problems and pressures faced by China's domestic economic and social development? ANBOUND researchers believe that the outlook is not optimistic. Firstly, from a national perspective, many regions are under pressure, and if all of them rely on state-owned commercial banks for rescue, it would be impossible to save them all even if the banks pour all their resources into it. Secondly, the current development issues in China are not merely debt or credit problems but more complex systemic problems. One prominent issue is the problem of the market system, with complications arising in market mechanisms, corporate confidence, government public services, and consumer confidence. Simply relying on improving financial support is unlikely to reverse the current situation.
Final analysis conclusion:
The key challenge currently faced by China is development, and it is widely acknowledged that stabilizing the economy is of paramount importance. However, the question remains: How can these objectives be achieved? Should the focus be on short-term emergency measures or on fostering the market and rectifying long-term mechanisms? Divergent opinions persist within the country. Our perspective is that while addressing immediate concerns, it is crucial to prioritize the medium to long-term mending of market mechanisms and the cultivation of a conducive market environment. Neglecting these underlying factors will perpetuate short-term and long-term issues. This assessment also applies to the provision of financial support by state-owned commercial banks to local regions.
