Chinese Authorities Allow First Bankruptcy By Commercial Bank In 20 Years

China’s central bank, the People’s Bank of China, has permitted the first bankruptcy of a commercial bank in almost 20 years.

The central bank authorized the liquidation of Baoshang Bank due to “severe insolvency” issues one year after it took control of the regional lender.

“Bank of Baoshang will be filed for bankruptcy and the original shareholders’ equity and unprotected creditors’ rights liquidated in accordance with the law,” the People’s Bank of China said on Thursday.

Baoshang is based in the city of Baotou in inner Mongolia.

The last known failure of a Chinese commercial bank was the collapse of Shantou Commercial Bank in 2001.

Financial Times reported that the decision to allow the bank to collapse was unusual since the Beijing government has long sought to avoid bankruptcies lest they undermine public confidence in the financial sector.

A government takeover of banks is also a rare occurrence in China – prior to last June’s seizure of Baoshang, Beijing had not taken such a measure since 1998 when it took over Hainan Development Bank.

That takeover led to liquidity problems for banks as larger institutions temporarily ceased lending to smaller ones.

“They [Chinese authorities] need to lower the moral hazard, and there’s no better case than Baoshang Bank,” said Alicia Garcia Herrero, senior Asia economist at Natixis, a French investment bank.

Earlier this month, China Finance, a publication of the central bank, reported that Tomorrow Group, a financial conglomerate, had used more than 200 shell companies to borrow some $22.5 billion from Baoshang.

The chief of Tomorrow Group, billionaire Xiao Jianhua, has since disappeared. Baoshang was also previously controlled by Xiao.

At its peak, Tomorrow Group had stakes in 44 financial companies.

The South China Morning Post reported that Xiao is awaiting trial for bribery and stock manipulation.

Some analysts do not think Beijing will permit the bankruptcies of more struggling lenders.

Michelle Lam, Greater China economist at Societe Generale, said Baoshang was a “very unique case.”

She noted that Beijing has been asking local governments to issue special bonds in order to prop up local lenders with fragile balance sheets.