Hong Kong trouble, looming financial crisis sink world's biggest banks in China

World's four biggest banks, which are owned by the Chinese state, are in major trouble having lost $14 trillion of assets amid fear of a financial meltdown triggered by US-China trade wars and Hong Kong democracy protests, media reports say. There is widespread fear that the government in Beijing will direct them to bail out their smaller peers as crisis spreads through the economy, the reports say.

Industrial and Commercial Bank of China Ltd, the world's largest lender by assets, lost $11 billion of market value last week after recapitalizing a troubled regional bank as part of a government-led rescue program, a Bloomberg report said. Big Chinese lenders have long sacrificed profits for "national service", but that prospect has become increasingly worrying as pressure builds on their regional, city and rural peers, according to the report. Smaller Chinese banks need an estimated $349 billion of fresh capital, according to UBS Group AG. For shareholders already skittish about the US-China trade war, rising corporate defaults and slowing economic growth, the asset management group advises sell.

"State-owned commercial banks are clearly suffering from the market impression that they will need to swallow other smaller and weaker banks, at least partially,'' said Alicia Garcia Herrero, chief economist for the Asia Pacific at Natixis SA in Hong Kong. ICBC tops the list of biggest banks in assets at a whopping $4.4 trillion, followed by China Construction Bank at $3.6 trillion and Agricultural Bank of China at $3.5 trillion with Bank of China at $3.2 trillion placed fourth on the global list. Japanese bank Mitsubishi UFJ is in the fifth position at $2.9 trillion.

The apparent silence of the China Banking and Insurance Regulatory Commission and press officers at the country's other mega-banks – China Construction Bank Corp, Bank of China Ltd, and Agricultural Bank of China Ltd – has not helped ease the fears, according to the report.

China's $40-trillion banking system has been dominated by the big four banks for decades. But they've been joined in recent years by hundreds of smaller banks, many of which funded themselves with opaque asset management products and dubious interbank borrowing. These smaller banks are now getting squeezed as regulators clamp down on risky funding methods and China's economic slowdown causes bad loans to increase.

The Chinese government cannot afford to allow these smaller banks to fail because that could trigger a financial meltdown and trigger capital flight with a cascading impact on the economy, analysts feel. Beijing stepped in to take over a failing bank for the first time in 20 years when it took over Baoshang Bank Co two months back. It directed ICBC to inject capital into Bank of Jinzhou Co. Analysts predict that more of China's roughly 4,000 small lenders will soon be trouble and that bigger banks may be required to save them.

"The smaller banks, as they require the fire hose, will likely get rolled up into the bigger banks, where they can disappear," the report quotes Christopher Balding, an associate professor at Fulbright University Vietnam who has written extensively on the Chinese economy and financial system, as saying.