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The health of China's smaller banks has come under pressure as Yichuan Rural Commercial Bank and Yingkou Coastal bank are said to have suffered bank runs in recent weeks amid fears over poor management and liquidity issues. Earlier this year, a rare government takeover of Baoshang Bank and a state rescue of Jinzhou Bank and Hengfeng Bank raised concerns about the underlying health of hundreds of small banks in China.
Admittedly, China has entered another round of re-leveraging, albeit a softer one this time. With the fundamental issue of macro leverage unsolved, we expect China's debt-to-GDP ratio, currently in the 290-300% area, to reach 320% by 2025 (chart 1).
If credit growth continues to accelerate in the ongoing process of re-leveraging, private sector loans will account for a higher percentage of the commercial banks' loan portfolios. With the balance sheet outlook of privately-owned enterprises continuing to worsen, smaller banks will see further deterioration of the asset quality of their loan portfolios. Chart 2 shows that the cumulative default ratio of private enterprises reached as high as 16.1% in Oct this year.
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