Bank of China’s new if limited yuan trading facility for its U.S. customers is another small step in the direction of internationalizing the currency. It is the first time customers can to buy and sell yuan using accounts at the state-owned bank’s U.S. branches, rather than go through Hong Kong. A limit of 20,000 yuan ($3,000) a day can be bought per individual’s account, the same cap that applies in Hong Kong to limit speculation. Business accounts are uncapped.
Beijing has been pushing its importers and exports to settle trade less in dollars and more in yuan, and allowing the development of an offshore market in the yuan. Cross-border trade settlements in Hong Kong grew from an average of 4 billion yuan a month in the first half of last year to 68 billion yuan in October. China Bank of Construction forecast recently that this number could reach 1.6 trillion yuan a month by 2015. However, the trend is more pronounced in the trade with countries other than the U.S.
Nevertheless, it has helped swell the yuan deposit base in Hong Kong to 260 billion yuan at end-November 2010, and the introduction of markets in the currency and of yuan-denominated financial instruments, including so-called dim sum bonds. Trading in the currency was allowed in Hong Kong last July. Daily trading has now reached $400 million. Given $4 trillion is the total of all daily currency trading, the internationalization of the yuan still has a long way to go, but it is clear where it is headed however cautiously.
The great shoring up of China’s state-run banks continues with Bank of China’s announcement that it is seeking to raise 60 billion yuan ($8.9 billion) of new capital through a shares issue in Shanghai and Hong Kong. This follows the $5.9 billion that the bank, the country’s fourth largest lender, raised via convertible bonds last month. Bank of China was one of two of the four big state-run banks (China Construction Bank was the other) that fell below the regulators required capital adequacy ratio in March,
Agricultural Bank of China, the no 3 lender, is looking to raise $23 billion through what would be the world’s largest initial public offering (final pricing due on Tuesday). ICBC and China Construction Bank, the two biggest lenders, have also said they plan to raise new capital.
We hear that institutional investors have modestly oversubscribed their part of the Agricultural Bank’s issue, unlike the manic demand that surrounded the last round of Chinese state-bank capital raising in 2006. They are not alone in their nervousness. In May the state council reduced its targets for the big four’s capital raising to a total of 287 billion yuan, down from the original 331 billion yuan seen a necessary to boost the banks’ balance sheets following the record lending undertaken over the past couple of years as part of the government’s stimulus program.
Quite how many bad loans will turn out to be sitting in those swollen loan books is the million dollar question. With as much as 20% of the loan assets of China’s banks now sitting in the unregulated underground banking system that operates at the county and city level, often hand in glove with local officials, we may not know until it is too late.
Filed under Economy, Markets
Bank of China’s announcement that it is to raise 40 billion yuan ($5.8 billion) of new capital through a convertible bond issue is the latest example of the authorities moving to sop up the stimulus-feed liquidity slopping around the economy. The big state-owned banks have to told to get back in line with their minimum capital requirements after last year’s 9.5 trillion yuan lending spree (with Bank of China at the forefront). They have also been told to rein in new lending, a message repeated again last week after previous strictures apparently fell on deaf ears and an estimated 1 trillion yuan was lent out in the first two weeks of this month. Regulators are worried by the risk of lending fueled property and stock bubbles going pop, nascent signs of inflation and the possibility of banks being left with bad loans on their books (and they have seen in America what happens when that occurs).
At the end of September, Bank of China says, its capital adequacy ratio was 11.63%. As it needs an estimated 140 billion yuan over the next two years to maintain the required 12% ratio, this may not be its last capital raising exercise. And expect the other big state-owned banks to follow suit.
An odd story on the BBC: Bank of China is considering a bid for the U.K. mortgage lender HBOS, which is being taken over by another British bank, Lloyds TSB under the British government’s bailout of its banks. The unsourced BBC report says talks are “at a pretty early stage.”
Were such a takeover to occur, it would be the biggest overseas acquisition ever by a Chinese bank. Not likely as things now stand, nor as things stood before the global financial crisis (see “Faced With Losses, Beijing Stops Banks Buying Abroad“).
To this Bystander, this smells of investment bankers carpet bagging.
The FT reports that Bank of China, China’s fourth largest commercial bank, has sold a net $4.6 billion of debt issued by the two giant but troubled U.S. mortgage agencies, Fannie Mae and Freddie Mac.
Two points to be made about this: first, foreign investors have been the mainstay of this market, averaging purchases of $20 billion a month in the year to July, according to U.S. Federal Reserve data. That is twice their purchases of U.S. Treasuries. But but now Asian investors in particular have become net sellers of the agency debt. That is removing an important prop from under the market.
Second, Bank of China is still state-controlled, so its sales could signal an official change of sentiment towards holding agency debt or even U.S. dollar-denominated securities in general. For now, the stepped up purchases of Treasuries by foreign investors makes the second of those unlikely, but it needs a weather eye kept on it.
China’s banks are taking their lumps from losses on trading mortgage-related securities, even while the strong domestic economy is boosting profits.
Bank of China reports a larger than expected $1.3 billion of subprime writedowns while Industrial & Commercial Bank of China, the world’s largest bank by market capitalization, reported $400 million-worth. Bank of China says it has sold down its exposure to subprime mortgage-related mortgages to $5 billion from $9.5 billion in August. ICBC says it holds $1.2 billion of such securities, the same level as last June.
Both banks were announcing their 2007 results: net income up 65% at ICBC and 31% at Bank of China. The average for China’s 14 publicly traded banks is 70%.
That number will shrink substantially this year as the government turns the screw on bank lending as it tries to damp down inflation.
China’s home-grown hedge fund, Bohai, has made its first investment. It is paying 1.5 billion yuan ($201 million) for a minority stake in Tianjin Pipe Group, according to the Asian Wall Street Journal. The deal is likely to be announced later this week.
Tianjin Pipe is China’s leading maker of steel pipe for use in oil pipelines, with a 50% domestic market share. The state-owned enterprise was turned into a shareholding company in 2006. It made a net profit of 1.4 billion yuan in 2006, up 46% from a year earlier.
Last month, two of China’s strongest investment banks, Citic Securities and China International Capital, were approved to start hedge funds, joining Bohai, which is an offshoot of Bank of China, in the fledgling industry. Bohai raised 6.1 billion yuan for its first fund last year — so it is not quite in the Carlyle or KKR league yet.
Filed under Economy, Markets