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China announced plans to rein in the expansion of lending by the nation’s regional banks to areas beyond their home bases, the latest step policy makers have taken to defend against financial risk in the world’s second-biggest economy.
Those lenders, which include rural cooperatives, must have the proper licenses to provide financing beyond the region where they’re based, or else must wind down those businesses, the China Banking and Insurance Regulatory Commission said in a statement Saturday. That includes setting up units in regions where the banks have no branches.
Smaller regional lenders have become major drivers of shadow banking in China as they’ve sought ways to enhance profitability. UBS Group AG issued a report last year highlighting how such lenders from the rust-belt region of northeastern China had used various shadow-banking products to extend their lending beyond their home provinces, thereby exposing themselves to a much wider spectrum of risk.
"This is in line with the campaign of stricter financial oversight. The city banks would be more exposed," said Gai Xinzhe, senior analyst at Sino-Ocean Capital in Beijing.
"They would find it very difficult to circumvent regulation via their old practice such as setting up shadow-loan instruments in Beijing and Shanghai."
Medium-sized and small financial institutions should stick to their positioning, "plowing through their local market" and providing quality financial services to the agricultural sector and small and micro-sided businesses, the commission said in the statement.
In the meantime, overseas expansion of all banks also will be scrutinised. "Banks setting up overseas operations must obtain approvals from both domestic and overseas regulators," according to the statement.
"Any business organisation that has been established outside the territory of the People’s Republic of China but has not been approved by the domestic or foreign regulatory authorities after communication shall be withdrawn in a safe and orderly manner."
The regulator has granted a one-year grace period to banks until next December for the rules to apply.
China has issued a number of directives on everything from excessive borrowing to speculation in equities to address risks in its financial system. By the end of 2017, total borrowing had ballooned to about 265.85% of the size of the economy.
