Interesting article in the FT from a couple weeks ago that I am just reading now. It is geared towards IPOs, which I don’t always follow all that closely in certain industries, but one thing stuck out. Apparently several of the larger municipal banks are attracting foreign equity partners.

Why is this important? As you no doubt recall, we had/have a little problem here with non-performing loans (NPLs). These have been “cleaned up” as far as the big State-owned policy banks are concerned, which involved spinning off debt to asset management companies. That isn’t to say that these NPLs have been properly dealt with, but that’s another story. Anyway, as the banking sector has grown, there has been a tremendous amount of expansion coming from city banks.

This expansion has quite a few folks concerned about that pesky NPL problem. The worry is that while the big four may have learned their lessons, these newer institutions may not be so cautious, and regulators may not be ready to adequately clamp down on poor lending practices, particularly in secondary and tertiary cities.

This brings us back to foreign equity partners. If some of these municipal banks are bringing in foreign shareholders, which makes sense since all the yummy deals have already been done with the big four, they will most likely bring with them expertise in risk management, good lending practices, etc. This is supposedly what has been happening with the big banks that have already gone through restructuring, equity sales, and public listings and are apparently on their way to much better internal systems. I can’t really comment on progress since I have not read anything for quite some time on the effects of having these strategic partners.

Always remember that there is no credit reporting system in China, so this stuff is not so easy for financial institutions. Anyway, for those who worry about these city banks, perhaps this is a small ray of sunshine?