The governor of China’s central bank sought to ease concerns on Thursday over the growing level of risk at troubled small banks in the country, following the first state takeover of a lender in 18 years.

Yi Gang of the People’s Bank of China, speaking at an event in Beijing, said the central bank was “fully capable” of managing risks at small banks, and that it planned to increase the supply of credit to small companies, according to local media and Bloomberg.

The remarks come just days after the central bank announced that regional lender Baoshang Bank would be taken over by the government for the next year in order to solve serious credit problems.

The news has revived concerns over the stability of China’s financial system, particularly over the thousands of municipal and rural lenders that constitute about a quarter of the country’s commercial banking assets. It has also raised questions over the economic impact should some regional banks curtail lending to small and medium-sized companies.

The central bank has taken proactive measures over the past week to battle against potential cash crunches. On Wednesday it said it would inject Rmb270bn ($39bn) into the market, the biggest open markets operation since January and a sign that the Baoshang incident had affected sentiment.

Fixed-income strategists have noted that the government’s decision to guarantee only up to Rmb50m of Baoshang’s interbank borrowings and corporate deposits earlier this week sent a strong signal to the market that regulators would not back all of the risks connected to the bank.

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“Chinese interbank funding costs heated up after the takeover of Baoshang Bank,” said Cindy Huang, an analyst at S&P Global Ratings. “Smaller banks’ wholesale funding costs through the bond market have also increased. If these costs remain elevated over a sustained period, smaller banks may have to pass the increase on to their borrowers.”

Mr Yi on Thursday noted that the government would make sure that small and medium-sized businesses had access to credit, saying that big banks would increase lending to SMEs by 30 per cent this year and the average cost of financing would come down by 1 percentage point.

Experts worry that more problems with smaller lenders could inhibit government efforts to maintain a flow of credit to small companies. That, in turn, could affect China’s overall economic growth rate this year, which is expected to slow to a 30-year low.

Katherine Lei, JPMorgan’s co-head of banks for Asia excluding Japan, noted that the troubles with Baoshang and other small banks “may lead to a rise in interbank funding cost and slowdown in liabilities growth of rural and city commercial banks, who are key lenders to SMEs. Thus, we expect their loan growth to slow down in the near term.”

The fall of Baoshang — once controlled by Xiao Jianhua, the Chinese billionaire abducted from Hong Kong by Chinese security services in 2017 — has raised questions over whether more small banks will face a similar fate.

Officials sounded the alarm earlier this year with a report from the National Audit Office that said some small banks faced non-performing loan rates of more than 40 per cent.

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On Wednesday, Chinese language news reports, quoting unnamed officials, said that some rural commercial banks and city commercial banks were facing serious credit risks and were on the verge of technical bankruptcy. The reports, however, were quickly removed from online.

Via Financial Times