“CAbbey Homes “ Hegang has brought some notoriety in recent years. In a small town in the far northeast of China, flats are being sold at extremely low prices – some only $ 3,500 per piece – compared to the cheapest items on the vegetable market. The economic outlook for the region has been so bad for so long that it can’t hold its own. The city, located in Heilongjiang Province, has lost about 16% of its population in a decade. Cabbage houses were built by the government to help alleviate poverty, but they have found very few buyers. The local government is now struggling to pay off its debts and restructure its finances. In late December, officials said they had stopped hiring new government employees to save money.
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Hegang is one of the saddest stories from Heilongjiang, Jilin and Liaoning in China’s Rustbelt province. Russia’s border region, known for its long, bitter cold winters, has languished year after year in desperate economic conditions as state-owned factories have closed and young people have moved south. Weak energy infrastructure means that companies in the region will be unevenly affected in 2021 due to severe power shortages. In a desperate effort to move families away and encourage population growth, Jillian has announced that it will “provide consumer loans for married and born” couples up to 200,000 yuan ($ 31,500).
Poverty also raises concerns in the region’s banks, with total assets at 15.8trn yuan in September. Bad debts are already higher than in any other part of northeastern China; Debt-loss provisions are the lowest. Yet creating a crisis is a difficult task. A simple strategy for small banks to hide bad debts. Less staff of local regulators. And domestic credit-rating agencies cannot be counted on to identify problem lenders. In the first seven months of 2021, rating agencies downgraded only six banks. They often take action only when a lender is on edge. Huancheng Rural Commercial Bank, located in Jilin, for example, suddenly announced that its net profit had dropped by 42%.
For an inside view of China’s troubled banks, look at how much money the investment managers of the country’s largest lenders take from minors for loans. Most banks across China offer similar yields on negotiable certificates of deposit (NCDs), securities which are similar to short term loans from one bank to another, and which are traded in the interbank market. Pay on yield NCDThroughout 2021 there has been a decline in s issued by most banks across the country, indicating a reduction in perceived risk. Yet the banks issued in the three north-eastern provinces are different from the rest throughout 2021 (see chart).
Average premium paid for one year NCDCompared to the healthy provinces issued by banks in Liaoning, it rose from about 0.24 percentage points in February to 0.65 at the end of the year, according to Enodo Economics, a research firm. Banks in Heilongjiang and Jilin have offered similar premiums The high yields indicate that the big banks believe that local governments in the Northeast can fight to bail out their financial institutions in the event of a crisis, Enodor analysts say. (Surveyed NCDs were all still rated as AAABut by the rating agency, the safest.)
Northeast China is the main competitor to host the next banking crisis. Since 2019, two of the four major bail-outs of the city’s commercial banks have been located in the region. The failure of control and corporate governance means that some institutions have come under the influence of private corporations or individuals who have defaulted on their lending. Shengjing Bank, a large Liaoning-based bank with assets of 1trn yuan, has a high level of exposure to Evergrand, a failed asset developer. Some lenders in the region have lost billions of dollars while financial products have gone berserk. Liaoning’s regulators recently planned to bring together 12 troubled banks in a bid to stave off a crisis. That plan came down to just two later. It is not clear how the problems of the other ten lenders will be handled. 3
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This article is published under the heading “Northeast Exposure” in the Finance and Economics section of the print edition.