SCIO briefing on increasing special local government bonds and strengthening inclusive financial support for micro, small and medium-sized enterprises

SCIO briefing on increasing special local government bonds and strengthening inclusive financial support for micro, small and medium-sized enterprises.

China SCIO April 7, 2020

China Financial and Economic News:

I have two questions. First, what is the current level of government debt in China? Second, what measures is the CBIRC considering to deepen reform and prevent risks for small and medium-sized banks, which are vulnerable in the face of a volatile international market and increasing downward pressure from the domestic economy? Thank you.

Xu Hongcai:

Thank you for your questions. In general, the size of China's government debt has increased over the years, but at a manageable rate. As of the end of 2019, China's local government debt was 21.31 trillion yuan. If measured by the debt ratio (debt balance/comprehensive financial strength), the local government debt in 2019 was lower than the internationally accepted alert standard, at a rate of 82.9 percent. Along with the 16.8 trillion yuan of Central Government debt at the end of 2019, the total national government debt rate (debt balance/GDP) was 38.5 percent, based on the GDP data released by the National Bureau of Statistics, which is lower than the EU's 60 percent warning line and of major market economies and emerging economies. At present, the risk of China's government debt is generally at a controllable level. Thank you.

Zhou Liang:

You also asked the question about deepening reform and preventing risks for small and medium-sized banks. At present, there are more than 4,000 small and medium-sized banks in China, and their total assets account for about a quarter of our entire banking system. They are an important part of our banking system. For a long time, small and medium-sized banks have played an irreplaceable role in supporting local economic development, serving the private sector and small businesses, and facilitating issues related to agriculture, rural areas and rural residents. On the whole, small and medium-sized banks are operating steadily. Although the amount of non-performing assets has risen slightly, the risks are manageable, and the main operating indicators and regulatory indicators are at a reasonable range.

Let me review the measures introduced by the CBIRC in the past three years, especially after the CPC Committee introduced the prevention and mitigation of financial risks as a key mission. The CBIRC has adopted a series of measures to promote the reform of small and medium-sized banks and prevent and mitigate risks.

The first measure focused on the banks' main obligations and operations. We resolved to reverse any deviation from their main businesses and a blind pursuit of speed and scale, so that these banks can return to the businesses they were intended to do and focus on providing local services. In particular, they are expected to strengthen financial services within the community and county where they are located, with strict regulations on operation in other places.

The second measure improved corporate governance. We have sought an approach to integrating CPC leadership into the entire process of corporate governance and strengthening performance evaluation and accountability of the general meeting of shareholders, board of directors, board of supervisors and senior management, as well as directors, supervisors and senior executives. Those who fail to perform their duties will be held accountable and improper performances must be corrected. Deferred payment of remuneration and recourse were implemented as part of an effort to strengthen the incentive and restraint mechanisms.

The third measure optimized the shareholding structure. This included strictly reviewing shareholder qualifications, strengthening the "penetrating" management of shareholders, especially actual controllers, and regulating shareholder behavior, as well as rectifying illegal use of bank funds, illegal acquisition of bank equity, nominal holding of shares and manipulation of bank management via improper means. Recently, we investigated and dealt with the problem of inadequate equity management of some small and medium-sized institutions, removed ill-performing shareholders and adopted regulatory measures in strict accordance with the law. In addition, we carried out centralized custody of equity and applied strict regulations on equity pledge and change, as well as capital increase, in an effort to prevent insiders or major shareholders from illegally using banks and financial institutions as cash dispensers.

The fourth measure clarified the responsibilities of all parties. First of all, we clarified the primary responsibilities of small and medium-sized banks in deepening reform and risk control, because whether a bank operates well mostly depends on its efforts. It is necessary to use strict supervision to force banks to meet their responsibilities, improve their management system and risk control system, and operate in accordance with the law. Secondly, we promoted the fulfillment of responsibilities by local Party committees and governments. Small and medium-sized banks are basically operated locally, and therefore shareholders funded by local state-owned capital must fulfill their responsibilities. Once a risk occurs, the local government must fulfill their responsibility to handle it locally. As a financial administration, the CBIRC must fulfill its supervising responsibilities. As a supervisor, it must not be afraid to offend people and cannot be a "scarecrow." Instead, they must dare to supervise and be good at supervision, and rectify illegal acts.

The fifth measure enhanced capital strength. By accelerating the disposal of non-performing assets, classifying assets, increasing provisioning and profit retention, banks can have better endogenous capacity for replenishing capital. By issuing common shares, preferred shares, non-fixed-term capital bonds and second-tier capital bonds, banks can have more channels and methods for supplementing capital. Local governments are encouraged to inject funds or realizable assets to some small and medium-sized banks under high risks, or replenish capital for small and medium-sized banks through capital injection by state-owned enterprises. At the same time, we welcome qualified and competitive private enterprises and foreign-funded institutions to participate in the reform and reorganization of small and medium-sized banks.

The sixth measure applied policies based on specific situations. Instead of developing any universally applicable policy, we applied policies specific to an area or industry, taking into account of its priorities. For a few institutions under high risks, we used precise measures to remove the danger.

The seventh measure increased anti-corruption efforts in the financial sector. Those who engage in illegal and criminal activities, such as abusing power for money and tunneling, will be severely punished.

To sum up, as a result of regulation and governance in recent years, great improvements have been made in small and medium-sized banks regarding a development model, corporate governance, operation and management, and resistance to risks. We are very confident in their ability to deal with risks.

I will give you a successful example. Hengfeng Bank is a bank with assets close to 1 trillion yuan. Due to the suspected crimes committed by the bank's previous two chairpersons, it had a large number of bad assets. The regulatory authorities took decisive measures to deal with the issue. First of all, along with relevant parties, they replaced the chairperson, president and other senior executives, and reshuffled its leadership. Those that illegally possessed the bank's shared were expelled according to law, and all violators were investigated and held accountable. At the same time, the CBIRC, in close cooperation with the PBC, the MOF and local governments, introduced new strategic investors after the bank was stripped of non-performing assets and injected with capital by local governments. Under the premise of marketization and the rule of law, they successfully mitigated risks and completed the reform and reorganization of the bank. The market remained stable and there were no big fluctuations. Thus, we can say that we achieved the Central Government's goal of defusing risks precisely and maintaining overall stability.

Next, the CBIRC will continue and deepen the reform of small and medium-sized banks by mitigating risks and helping them to embark on the road of high-quality development. Affected by the epidemic and the economic downturn, a small number of these banks have accumulated problems, such as inadequate internal control and corporate governance, and are threatened by some risks and challenges. We will take bank-specific measures based on their actual situation, in line with the principles of marketization and rule of law. These will include reorganization with direct capital injection, horizontal mergers, the establishment of disposal funds and bridge banks, and the introduction of new strategic investment to accelerate reform and reorganization. We will also fully assess the risks that may arise in the process, make various plans and firmly adhere to the bottom line that no systemic financial risks can occur. Problems may pop up in certain banks, but we are confident that things are largely under control, and there will be no regional and systemic risks. Thank you.

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