China's ailing small lenders stay afloat through local government bailouts

In at least one deal, non-performing loans were sold at above-market rates.

Bloomberg reports that China’s local governments are injecting fresh capital into small lenders across the country.

At least 10 small Chinese banks have raised money this year by selling shares packaged with non-performing loans. In at least one deal, the NPLs were sold at above-market rates.

The capital injections amount to “local government bailouts through cash rich state-owned enterprises,” said Alicia Garcia Herrero, chief economist for the Asia Pacific region at Natixis SA. Regulators have learned it’s better to rescue troubled banks indirectly to limit the risk of contagion, she said.

The health of small banks has become a growing concern after the seizure of one lender in May forced losses on creditors and cast doubt on the longstanding assumption that the state would always backstop troubled banks.

Here’s more from Bloomberg.