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Rural China Banks With $4 Trillion Assets Facing Debt Test 

December 2, 2016

Xize Kang, Lianting Tu & Jing Zhao, Bloomberg

Bond investors are weighing rising risks that smaller Chinese banks will fail against growing signs the government will do anything to avoid a financial meltdown.

A lender called Guiyang Rural Commercial Bank Co. in the southwestern province of Guizhou sparked concern that risks among smaller lenders are spreading after its rating outlook was cut last month following a jump in overdue loans to 30 percent of the total. That compares with just 3 percent at the nation’s biggest lender. Short-term borrowing costs surged for the riskiest lenders including rural commercial banks, which hold 29 trillion yuan ($4.2 trillion) of assets, 13.4 percent of the total amount in China’s banking system.

Yet confidence in the government’s readiness to step in and offer support to struggling borrowers is rising as authorities allow a credit-fueled recovery of manufacturing activity, helping an official factory gauge match a post-2012 high last month. While 17 onshore public bonds defaulted in the first half of the year, there have since been only seven. The combination of government support and desperation for yield helps explain why Guiyang Rural was able to sell a junior bond at 4.7 percent last month, 1.7 percentage points less than a similar offering last year.

“Investors have yet to suffer losses from any bank capital securities, which adds to their confidence,” said He Xuanlai, a Singapore-based credit analyst at Commerzbank AG. Read more

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