9 Rural Commercial Banks Downgraded

Last week, Reuters: China banking regulator will study ways to restructure high-risk rural commercial banks

China’s banking and insurance regulator said on Thursday it will study market-based and law-based ways to restructure and reform high-risk rural commercial banks.

It will also invite commercial banks in good standing and qualified investors to participate in mergers and acquisitions (M&A) and restructuring of those rural commercial banks, the China Banking and Insurance Regulatory Commission (CBIRC) told Reuters in response to questions about risks facing the sector.

This week, 财新： 潮水退方知谁在裸泳：九家农商行被下调评级
"Only when the tide ebbs can one know who is swimming naked: nine rural commercial banks have been downgraded"

At the end of July, China Chengxin International Credit Rating Company lowered the ratings of Shandong Yucheng Rural Commercial Bank , Jilin Changchun Rural Commercial Bank , Jilin Changchun Development Agricultural Commercial Bank , Shanxi Pingyao Rural Commercial Bank , Guizhou Renhuai Maotai Rural Commercial Bank , Henan Yichuan Rural Commercial Bank , and Shanxi The rating outlook of Yuncheng Rural Commercial Bank and Shandong Yantai Rural Commercial Bank was negative; Shanghai New Century Rating Company lowered the rating of Jilin Luhe Rural Commercial Bank ; Oriental Jincheng Rating Company lowered the rating of Shandong Jixian Rural Commercial Bank ; Joint Credit Rating Co., Ltd. Downgraded the rating of Guizhou Wudang Rural Commercial Bank .

　　At the same time, so far, Sichuan Chengdu agricultural firm , Shandong Zouping Nong firm , Guangrao agricultural firms , Shandong Bo agriculture firm , Panzhihua City Commercial Bank , Bank of Jinzhou , Prudential Bank failed to disclose the 2018 Annual Report, that the rating agencies Failed to issue a tracking rating report.

No surprise: the banks are in trouble for non-agricultural loans. There is one bank with a spike in NPLs as farmers jumped onto soaring fruit prices (See: Fruit Freedom! Premier Li Discusses Fruit Prices, Analysts Forecast Relief After July):

Among the nine rural commercial banks that were downgraded, except for Henan Yichuan Rural Commercial Bank, most of the rating agencies described the reasons for the rise in non-performing loans of rural commercial banks, which were not related to agriculture. According to China Credit, as of the end of 2018, the rate of non-performing loans of Henan Yichuan Rural Commercial Bank increased by nearly 3%, partly because some farmers followed the wind and blindly invested in farms and fruit growing industries, resulting in operating losses due to backward technology and management abilities. It is difficult to repay the loan.

There's also some fraud cases involved:

The two businesses, one is the big bill case of the branch of Wuchang Wenchang Road, Gansu Branch of the Postal Savings Bank . In this case, the Post Office Wenchang Road Sub-branch did not issue inter-bank financial management qualifications, but in the name of the above-mentioned branches, it issued inter-bank wealth management with the notes as the underlying assets, and Jilin Luhe Rural Commercial Bank purchased 3 billion yuan. When the wealth management products expired, the mail storage Wuwei branch discovered that there was no record of the purchase of the Weihe Rural Commercial Bank, and it could not be redeemed. The case was issued (see Caixin.com, "The Bank of China’s Bank of China’s 7.9 billion bills was punished by the Banking Regulatory Commission. Bank 295 million"). According to the New Century Rating Report, Jilin Luhe Rural Commercial Bank has purchased the wealth management products of the Post Office Wenchang Road Sub-branch eight times since 2016, with a total of 3 billion yuan and a 5% interest rate with a term of one year. At present, Jilin Luohe Rural Commercial Bank has filed a lawsuit against the Postal Savings Bank through the channel . The case is under trial and the bank has not made provision for this asset.

And finally, our old friend the imploding daisy chain of credit guarantees makes a reappearance:

Another example is Shandong Yucheng Rural Commercial Bank. As of the end of March 2019, the bank’s NPL ratio was 8.53%, the concern loan rate was 11.33%, and the “problem loan” accounted for nearly 20%. According to China Chengxin, due to the impact of macroeconomic downturn and tightening of environmental protection policies, the local textile, sheet metal processing, wine packaging, machinery processing and other industrial enterprises have slowed the collection of accounts receivable, and the cash flow has obviously tightened. The conduction effect of the guarantee circle is superimposed, and the rebound pressure of non-performing loans continues to increase. “When the focus loan customers are operating normally, the risk of the guarantee circle is still down to the possibility of being bad.”

Although I doubt the credit guarantee will take center stage this time, it was at the heart of the prior credit downturn. Businesses in a given geographic area, often a city, mutually guarantee each others' loans from banks. Even without excessive leverage, the risk of a localized slowdown threatens to collapse this chain of guarantees. Firms also sell credit guarantees cheap because they assume the government won't let companies default. Layer on high leverage throughout the economy, often borrowed privately/illegally. It only takes one firm to have a crunch and the bank calls the loan, and it's a citywide credit crisis. Links to prior coverage are below.

April 2014: Rumored Mass Death of Companies in Xiaoshan District of Hangzhou If Banks Collect on Debts; Government Tells Banks to Sit Tight or Leave
June 2014: Credit Guarantee Firms Go Down Like Dominoes

This quote sums up the situation (and does this not bring to mind AIG): "The profit model is an important reason for the large-scale collapse of credit guarantee firms, a 2% profit is not sufficient for taking on 100% of the risk."

July 2014: Credit Guarantee Firms Continue to Implode, Private Bonds Default
July 2014: Largest Privately Run Credit Guarantee Firm in Sichuan Goes Bust

August 2014: Wenzhou Tries to Restructure Credit Guarantee Firms; More Than ￥50 Billion in Bank Loans At Stake
August 2015: More On Hebei Credit Guarantee Collapse; 3 "Invisible" Trusts Also Involved
November 2015: Daisy Chain Explodes: PE and Trust Funds Default Due to Hebei Credit Guarantee Default
This 2015 post has lots of links to other credit guarantee stories: The Credit Dominoes Are Falling Again; Northeast Faces Deflationary Collapse Without Bailout