China to Buy Stake in Another Troubled Regional Bank: Report

(Bloomberg) -- Central Huijin Investment Ltd., a unit of China’s sovereign wealth fund that owns stakes in a range of major financial institutions on behalf of the government, will buy into troubled regional lender Hengfeng Bank Co., according to local media.

The report by 21st Century Business Herald didn’t give more details of the acquisition, or say where it got the information. If confirmed, it would be the third rescue of a regional lender engineered by authorities in less than three months. Hengfeng, based in China’s Shandong province, declined to immediately comment.

China’s banking regulator said in June that the Shandong government was speeding up the restructuring of Hengfeng, a mid-sized bank that has failed to disclose its financial statements for two straight years. The lender had 1.2 trillion yuan ($170 billion) of assets at the end of 2016, according to its most recent annual report.

Central Huijin’s move would underscore policy makers’ efforts to restore confidence in smaller lenders, a key source of credit to small and medium-sized companies. China surprised the market in May with a government takeover of Baoshang Bank Co. -- the first bank seizure in more than 20 years. Two months later, regulators took a different approach by having three state-owned financial heavyweights buy stakes in Bank of Jinzhou Co., whose Hong Kong-listed shares have been halted since April.

Read more: A QuickTake on China’s new approach to bank stress

China’s central bank, in its first review of the industry’s risks, said in November that about one in 10 of the nation’s roughly 4,000 banks received a “fail” rating. Four hundred and twenty firms, all rural financial institutions, were deemed “extremely risky,” and only two received a top rating.

Jason Bedford, a UBS Group AG analyst who earlier flagged the problems at Baoshang, Jinzhou and Hengfeng, has said that China’s smaller banks face a potential capital shortfall of 2.4 trillion yuan. He’s estimated the size of assets “in distress” held by a broader universe of Chinese lenders at 9.2 trillion yuan -- about 4% of the commercial banking system and nearly 10% of gross domestic product.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Jeanette Rodrigues

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With assistance from Bloomberg