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FINANCE

Banking Regulator Scrutinizes Rural Institutions

By Wu Hongyuran and Han Wei

China’s top banking regulator is scrutinizing rural financial institutions as it steps up its campaign to rein in excessive leverage and financial risks.

The China Banking Regulatory Commission will launch inspections of rural financial institutions to exam their wealth management and investment activities, and interbank businesses, looking for potential risks, Caixin learned from sources close to the CBRC. The institutions include rural commercial banks, rural credit cooperatives and other deposit-taking entities.

The inspections will focus on rural financial institutions in 11 provinces where the institutions’ investments in the interbank market have exceeded 10 billion yuan ($1.6 billion), said the sources, who attended the CBRC’s annual meeting on rural financial works on Wednesday.

Inspection results will be submitted to the commission by the end of April, sources said.

The CBRC will order rural financial institutions to reduce their investments in wealth-management products issued by other banks and cap their investments in low-rated bonds or investment plans managed by other financial institutions, such as securities brokerage and trust firms.

The CBRC’s move on rural institutions followed its previous pledge to continue a deleveraging campaign this year and further squeeze the interbank market, the main source of short-term and cheap funding for banks and nonbank financial institutions that borrow money to invest in higher-yielding assets.

Last year, regulators took measures to rein in financial institutions’ dependence on the interbank market, where much of the money used for “shadow” banking activities originates. Shadow banking refers to potentially risky lending outside the formal banking system.

Commercial banks’ interbank assets and liabilities fell by 2.8 trillion yuan and 830 billion yuan respectively by the end of November from the beginning of 2017, and the growth in wealth-management products sold between financial institutions has also fallen back.

Assets managed by rural financial institutions totaled 1.57 trillion yuan by the end of 2017, about 40% of which was invested in the interbank market, according to Zhu Shumin, vice chairman of CBRC. Such practices helped the institutions to expand their business with risky investments rather than benefiting the economy, said Zhu, according to attendees of the CBRC meeting.

At the meeting, Zhu criticized rural financial institutions for providing cheap funding for other commercial banks to invest in high-yield but risky assets, directing capital away from the rural sector while accumulating bad loan risks.

For five straight years rural financial institutions’ loan issuance to borrowers outside the rural and agricultural sectors has exceeded that issued to the sectors they were intended to support, Zhu said.

The CBRC has already taken action to curtail rural institutions’ excessive interbank investments. In December, the Changchun Rural Commercial Bank was fined 200,000 yuan for irregularity in accounting practices related to its interbank business. Shenfu Rural Commercial Bank in the northern province of Liaoning was fined 500,000 yuan for violating wealth management and interbank lending rules.

Contact reporter Han Wei (weihan@caixin.com)


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