Last month, May 2019, the People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission seized (CBIRC) control of Baoshang Bank, a bank based in the inner-Mongolian autonomous region of Baotou.
China’s Central Bank is now seeking to alleviate investor and stakeholder concerns regarding the surprising turn of events. Although Chinese markets were sent into shock after the announcement of the bank takeover, the government stated that it is an isolated incident caused by the misappropriation of funds by Baoshang’s largest shareholder. Adding that it does not have plans to take over other institutions, the PBOC stated it has confidence in the stability of the financial markets.
How Did it Happen?
Tomorrow Group is the investment conglomerate led by Financier Xiao Jianhua, which holds close to an 89 percent stake in Baoshang Bank (South China Morning Post_Bloomberg News_Jun 3 2019 ). Baoshang Bank appears to have been an important part of Xiao’s business, as it holds stakes in companies across sectors—such as technology, real estate, energy and financial services. The government was forced to intervene in Baoshang’s operations after a large amount of the bank’s funds were embezzled, opening the business and its customers to serious credit risk.
The Chinese authorities have been tracking Xiao’s business dealings and interests since before 2017, when he left Hong Kong for mainland China. He has been known to “make deals” with people in powerful positions, which has made a few in the regulatory space uncomfortable. For example, in The New York Times in 2014, he admitted that he helped Xi Jinping’s relatives dispose of their assets when the president came to power, although no profit was gained from the dealings (South China Morning Post_Lo Kinling_Jan 31 2017).
What Happens Now?
The investigation into the Tomorrow Group is ongoing, as Chinese officials are probing the conglomerate for more detailed information. While the inquiry is under way, the inner-Mongolian bank’s daily operations are entrusted to China Construction Bank, a large, state-owned lender, for one year, according to regulators (South China Morning Post_Shidong Zhang_May 24 2019).
China’s chief securities regulator Yi Huiman is confident in the nation’s stability, citing healthy capital markets—even with the ongoing US-China trade negotiations. Following the government takeover of Baoshang, creditors with more than 50 million yuan are expected to initially recover 90 percent of the payable debt. Additionally funds that were not guaranteed initially will be maintained, and Baoshang’s repayment of debt to all individual savers and corporate/interbank debt holders with 50 million yuan of liabilities or less will be guaranteed by regulators.
Looking Toward the Future
Responding to the slowdown of market growth and expert opinion, the CBIRC announced new directives calling on lenders to increase their lending to small and micro enterprises by 30 percent by the end of 2019 compared to the beginning of the year (PYMNTS_March 13 2019).
The PBOC plans on utilizing a variety of different policy tools to stabilize the money markets and increase liquidity:
- Aimed at boosting lending to small and private companies, PBOC will establish a targeted medium-term lending facility providing a long-term and stable source of funding for private and small firms.
- PBOC will continue to enact “prudent and neutral” monetary policy to ensure liquidity
- PBOC will increase the lending and rediscount quota by $14.5 billion, which will deliver more financing to smaller enterprises.