China Weighs Raising Billions to Rescue Troubled Financial Firms

(Bloomberg) -- Chinese authorities are considering a plan to raise several hundred billion yuan for a new fund to backstop troubled financial firms, according to people familiar with the matter.

The People’s Bank of China is leading the effort, seeking to shore up confidence in the $60 trillion financial system as the economy slows and a debt crisis in the property industry spreads. The stability fund would dwarf other pools available to bail out troubled institutions and their depositors.

China is moving to stem financial risks ranging from hundreds of weak rural banks to dozens of distressed developers saddled with at least $1 trillion of liabilities. Challenges are mounting as the debt crisis ripples through the property market and as a resurgence in Covid infections forces a partial shutdown in Shanghai, threatening to sap momentum in the world’s second-largest economy.

While the key mandate of the new fund is to rescue financial institutions, it could indirectly help too-big-to-fail entities in other sectors including real estate by providing financing through banks, said the people, asking not to be identified discussing a private matter. This would be the first fund dedicated to ensure broad financial stability, unlike previous funds that were more targeted.

The central bank is working with the China Banking and Insurance Regulatory Commission and the Ministry of Finance to set up the fund. The capital will come from a variety of sources including local governments and major banks, as well as funds set up to insure retail deposits and bail out insurance and trust firms, the people said. 

The PBOC, CBIRC and the finance ministry didn’t immediately respond to requests seeking comment.

The State Council last week said China aims to complete the stability fund by September after Premier Li Keqiang announced the plan this month. The facility will be used to dissolve major risks, and become part of the safety net for China’s financial system, according to the banking regulator. The government didn’t elaborate on where the money will come from or how big the fund will be. Several hundred billion yuan would equate to tens of billions of dollars.

As part of the proposal, the regulators may also raise the premium rate paid by some banks to insure their deposits, said the people. The size of the fund could be increased if needed, they said. Details of the plan are still under discussion and subject to change. 

The PBOC labeled 316 financial institutions as high-risk entities in the fourth quarter, most of them small rural banks. Confidence in the regional banks was jolted in 2019 when regulators seized control of Baoshang Bank Co. in Inner Mongolia -- the first such move in two decades -- and imposed losses on some creditors. Authorities have since orchestrated bailouts of two other banks and intervened to quell at least two bank runs. 

Setting up a stability fund signals regulators are taking “proactive steps to prevent the potential spill-over effect from developer default to the financial system, which can mitigate the credit risk facing banks” in the long term, Citigroup Inc. analysts led by Judy Zhang wrote in a March 7 note. 

Regulators have recently eased a year-long cap on home loans and called upon its largest bad-debt managers to join the restructuring of weak developers and their lenders, after firms including China Evergrande Group defaulted on more than $7 billion in offshore bonds and consumers staged protests over unbuilt homes and soured investments. 

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With assistance from Bloomberg