China’s banks are caught between a rock and a hard place. In the wake of Baoshang Bank’s takeover, smaller banks are facing a contraction in wholesale funding in the form of both NCDs and interbank deposits. At the same time, many banks are struggling to meet stricter capital adequacy requirements. After years of aggressive informal lending to risky borrowers, those shadow assets are migrating back to official bank balance sheets, adding to capital pressures from a declining overall return on assets and a weakening cyclical outlook. The growth of banks’ capital bases are now critical determinants of the overall pace of credit growth and activity growth in China.
