Beijing is expanding its recapitalisation programme against a backdrop of declining profitability in the financial sector and persistent economic challenges, notes the Financial Times.
Around 300 billion yuan will be provided by the Chinese Ministry of Finance, with a further 60 billion yuan coming from state-owned tobacco companies. The funds will go to eight financial institutions, including the largest state-owned banks, ICBC and the Agricultural Bank of China, as well as insurers China Life and China Reinsurance.
Beijing expands support programme for the financial sector
The current programme is a continuation of the large-scale recapitalisation of state-owned banks. Last year, the authorities announced the allocation of 520 billion yuan to the country’s largest banks. However, the current round of support is broader in scope: the funds are being channelled not only to banks, but also to insurance companies and other state-controlled financial institutions.
Around 40 billion yuan of the total will go to state-owned lenders, including the Export-Import Bank of China and Sinosure, which play a key role in financing Chinese exports and imports.
The expansion of the programme comes against a backdrop of pressure on the financial sector from weak consumer demand and a protracted downturn in the property market. Low interest rates, which are reducing net interest margins, have become an additional problem for banks.
According to the Financial Times, Chinese banks’ net interest margin had fallen to 1.41 per cent by June. Meanwhile, insurers are facing pressure from low rates on the returns from long-term investments.
Support extends beyond the banking sector
The inclusion of insurance companies in the programme is of particular significance. According to the FT, this is the first major instance of state support for the Chinese insurance sector in roughly two decades.
Beijing is thus attempting to tackle two objectives simultaneously: to strengthen the financial balance sheets of state-owned institutions and to create additional opportunities for them to support economic activity through lending and investment.
At the same time, the Chinese banking system maintains high capital adequacy ratios. The FT notes that the current measure therefore appears less like a reaction to an immediate threat to financial stability and more like an attempt to offset deteriorating profit conditions and ensure the financial sector has the capacity to provide long-term financing for the economy.
Following the announcement of the programme, the share prices of some beneficiaries, including ICBC and China Life, fell by around 2 per cent. This suggests that the market did not view the recapitalisation solely as a positive signal: investors may also regard it as evidence of persistent structural problems in the Chinese economy and financial sector.
More broadly, Beijing’s decision signals continued state support for the economy via the financial system. The authorities are seeking to strengthen the ability of state-owned banks and insurers to finance long-term investment amid weak domestic demand and the ongoing restructuring of the Chinese economy.
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