China’s smaller banks forced to act to support shares
Stream of obligatory stock buybacks underscores challenges facing banking sector
A flurry of Chinese banks are being forced to buy back shares to stabilise their stock prices following a series of bank bailouts and mounting pressure on the country’s financial system. At least 10 small, listed banks have been required by local regulations to purchase their own shares after their stock traded below net asset value per share for more than 20 consecutive days. The share purchases, called “stock price stabilisation plans”, are mandatory for companies whose stocks perform poorly within the first three years after listing, and are common among China’s listed companies. However, the sharp declines by many small bank stocks and the steady stream of forced buybacks in recent months has exposed the plight of China’s banking industry, which is experiencing a wave of defaults with economic growth at its slowest in three decades.
While asset quality at larger banks has remained stable, a number of mid-tier and smaller banks have been saddled with high rates of non-performing loans, some exceeding 40 per cent of total assets. Several banks, such as Baoshang Bank and Bank of Jinzhou, have required state bailouts — a measure not taken by the central government in about 20 years. Other small institutions, including Yingkou Coastal Bank, have experienced bank runs as confidence among Chinese people about the safety of their savings wanes. Funding for banks has also dried up. Investors have abandoned the shares of smaller banks over the past three months, leading to swift price drops that have required buybacks by the lenders. Michael Chang, director of China financials research at CGS-CIMB Securities in Hong Kong, said: “With economic indicators weaker this year compared to last year, plus with some banks needing bailouts or capital injections earlier this year, this has placed pressure on bank share prices.” Most recently, shares in Jiangsu Zijin Rural Commercial Bank tumbled 13 per cent over three days of trading, prompting expectations among analysts that the bank, which listed in Shanghai earlier this year, will be obliged to eventually buy back shares. That followed an announcement from central China-based Bank of Zhengzhou last week that its share price had traded below its net asset value per share for more than 20 days, and that it would enact a stock price stabilisation plan. Its shares were trading at Rmb4.54 in Shanghai on Wednesday, 43 per cent below their listing price when the bank went public last year. Nine other lenders in recent months have been forced to undertake similar share buybacks.
Maintaining stability in China’s financial system is a priority for policymakers in Beijing, who view banking and markets upheaval as a threat to social order. Regulators have played down the problems facing small banks across the country but China’s central bank warned late last month that about 13 per cent of lenders, or 586 institutions, presented a “high risk” for financial distress.