China Opening Its Banks Is Great, If You Like Bad Debt

So China would like a bit of foreign expertise after all.

In a surprise move, and timed with U.S. President Donald Trump’s state visit, China said it would scrap foreign ownership limits for banks and asset management firms.

Asia’s biggest economy has been talking about opening its banking industry for a while now. Foreigners are already movers and shakers in the interbank market. As of Sept. 30, offshore investors held more negotiable certificates of deposit than domestic securities firms, a testimony to the success of the Hong Kong-Shanghai bond connect program that started in July.

(Related: China Makes Historic Move to Open Market for Financial Firms)

But there’s more to it than international nous.

China desperately wants to recapitalize its mid-sized joint-stock commercial banks, which it sees as posing systemic risks. Last year, the People’s Bank of China said that if a mid-sized bank were to default, on average, four to five other lenders would also be affected and more than 8% of the industry’s capital would be wiped out.

Taking a look at 41 publicly listed Chinese banks shows that only the very largest — Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd. and China Merchants Bank Co. among them — are reasonably capitalized. Plenty of lenders, from Postal Savings Bank of China Co. to Bank of Jiangsu Co., are in need of cash.

Will Western financial institutions want in? As my Gadfly colleague Nisha Gopalan has argued, it could be all a little too late. Economic growth in China has slowed and credit creation on steroids has fueled concerns of a resurgence in bad loans. Even the central bank governor is talking of a possible “Minsky moment.”