Tag Archives: banks

China’s Bankers Resist A Squeeze On Their Margins

China’s four big state-owned banks are reportedly resisting pressure from government planners to offer cheaper loans even as officials want lower interest rates to finance the 700 billion yuan ($110 billion) of infrastructure projects being advanced to stimulate the slowing economy. According to the 21st Century Business Herald (in Chinese), the banks are fearful of the squeeze on their profits and balance sheets while they are still potentially carrying scads of bad debt on their books from the 4 trillion yuan stimulus that followed the 2008 global financial crisis.

Local governments have budgeted for less than a third of the cost of the latest round of investment spending on roads and railways. The rest will have to be covered with bank loans. The banks’ credit quotas for the year still have room to accommodate this. The question is at what rates and to what extent private borrowing is priced out. Bloomberg reports that the banks are already limiting their corporate clients to 10% discounts of the benchmark lending rate, even though they have been free since July to offer up to 30% discounts, a move made by the central bank to encourage business borrowing. There are also concerns that banks are delaying new consumer loans. A case of what one hand stimulates, the other discourages.

Leave a comment

Filed under Economy

China Raises Banks’ Reserve Ratios Again As Inflation Persists

Persisting inflation has led China’s central bank to raise bank’s required capital reserves for the third time this year. Reserve requirements will increase by half a percentage point effective March 25th, the People’s Bank of China has announced, taking them to 20% for the country’s largest banks though some get customized reserve requirements that push their ratio above that.

Coming as it does so soon after the Sendai earthquake and tsunami suggests that inflation is still regarded as a bigger threat by China’s policymakers than a slowdown in growth that the devastation in Japan might cause, even as the central bank struggles to mop up the excess liquidity in the economy. This Bystander believes that the March figures may show inflation kicking 6% year-on-year, and that another round of interest-rate increases, which would be the fourth since October, won’t be long in coming.

Leave a comment

Filed under Economy

A China Banking Crisis: Possible But Not Likely

The prediction that China faces a 60% risk of a banking crisis by mid-2013, made by Fitch Ratings senior director Richard Fox in an interview with Bloomberg, falls into that category of eye-popping but not inconceivable.  Fox’s number comes from a risk model designed by the credit-ratings agency to predict banks’ vulnerability to systemic stress in the face of sustained rapid credit growth, rising property prices and an appreciating real exchange rate.

China has ticked at least two of those boxes for a long while, and indeed, Fitch’s model put China into the most at-risk category last June, though seemingly not many noticed at the time.  The model is not infallible. It raised a red flag about Ireland and Iceland ahead of their crises but not Spain’s. Countries can also retreat from the at-most-risk zone. Brazil, France, Denmark and New Zealand are recent examples. We think China is likely to join them.

Likely though not certain. A bursting property bubble and the local government debt bomb going off (and the two are so closely linked that the one would likely trigger the other) are the banking system’s greatest vulnerabilities. Policymakers are tackling both, though neither are susceptible to a quick fix. As the raft of piecemeal measures over the past 18 months to cool property markets, soak up excess liquidity in the economy, get local government finances and governance on a tighter rein and shore up banks’ capital reserves attest, it is painstaking work.

Given the scale of China’s lending binge over the past couple of years, it is inevitable that the banks will end up with some odorous piles of bad debt on their books. The question, of course, is whether they are mountains or molehills. The rapid pumping up of capital reserve ratios and the bank-by-bank way they are being required suggests the regulators have some fix on their magnitude and which are most threatening. It is the unexpected, though, that blindsides even the best layers of plans.

Prudent macroeconomic policy is the best way of avoiding a banking meltdown anywhere. As we have noted, the shift in policy Beijing is now trying to pull off to minimize what it sees as politically threatening social disparities caused by full-pelt economic growth gives the economic planners additional priorities that will complicate prudent macroeconomic management. Further, some of the tools at Chinese policymakers’ disposal are still rudimentary, one reason that the new five-year plan makes much of the need to continue financial reform. Yet they do have one big advantage in managing a potential banking crisis: administrative guidance over both the dominant banks, which are state-owned, and their big customers, similarly state-owned. That guidance is not always followed to the letter, but if a systemic crisis loomed both banks and state-owned enterprises would soon find guidance coming with arm-twisting.

Beijing has already bailed-out the big banks once from their bad loans in the past decade, and it could do so again if necessary. It could also, we should say, would also, spread the stress of a developing banking crisis to avoid it causing a systemic failure. We still don’t think it is likely that it will have to absent that black swan, and the more progress there is on structural reform of the financial sector, the longer the odds get, but it is not impossible that it might.

Footnote: Economist Michael Pettis makes the point about the political protection of China’s banking system much more elegantly in a post on why the yuan won’t become a reserve currency any time soon (a point on which this Bystander also agrees):

It is worth pointing out that the Chinese banking system is one of the least efficient in the world when it comes to assessing risk and allocating capital, and would be bankrupt without repressed interest rates and the implicit (and sometimes explicit) socialization of credit risk.  Beijing accepts this because of the tradeoff that gives it banking stability.

Beijing greatly values this stability, even at the expense of capital misallocation, and is in no hurry to give it up by opening up the financial markets and, what’s more, for political reasons I think local governments will resist ferociously any further corporate governance reform.  Remember that the phrase “corporate governance reform” in the banking context is just another way of saying that credit decisions will be made on the basis of economic considerations, and not on the basis of government preference.  That particular reform will be politically contentious.

Leave a comment

Filed under Economy

The Two Instabilities

As the 11th National Committee of the Chinese People’s Political Consultative Conference, the country’s top political advisory body, meets in Beijing to ratify a new five-year plan to rebalance the economy and to tackle inflation and rising property prices, two comments from western China illustrate the Morton’s fork China’s economic policymakers find themselves somewhat uncomfortably stuck by.

The first occurred at a recent meeting of regional managers from one of the large state-owned banks. A manager from Xinjiang, we are told, complained that credit quotas imposed by the banking regulators were constantly tightening in the cause of the national fight against inflation, making his bank’s branches unable to meet the local demand for loans, demand that was rising because of the development priority now been accorded to the region by Beijing.

The central bank is repeatedly dabbing up as much of the excess liquidity in the economy as it can through interest-rate hikes, higher capital reserves requirements on banks and administrative measures such as new-loan quotas. The goal is to dampen inflation and to let down the asset bubbles inflated by the lending spree triggered by the post-global-financial-crisis stimulus.

Yet it is precisely through fixed-asset investment that the government has been able to deliver the constant economic growth that the Party sees as essential to legitimize its monopoly on power. The second comment, from Xinjiang regional chairman Nur Bakeri just this week, spells out how raising living standards through economic development is key to maintaining social stability. “Development is our top priority and stability is our greatest responsibility. Without development, there would be no stability and vice versa,” he said.

Such local political pressures lie behind not just the continued pace of new bank lending this year, but also the discovery in February by the banks’ regulator, China Banking Regulatory Commission (CBRC), that more than half of new bank lending wasn’t meeting its new credit rules designed to mitigate the fear that China’s banks are sitting on a potential dung heap of bad loans. The rules require banks to meet tougher credit and risk standards with new loans. As far as the banks are concerned it is a case of old habits die hard. For years and years and years, China’s growth has been fueled by fixed asset investment financed through government-directed bank lending. Flash the cash and the devil take the hindmost.

Beijing had to bail out the big banks once to cleanse their loan books. After a couple of years of stimulus fueled record lending, it worries it may have to do so again. The recent turn to the capital markets by the big four state-owned banks has been in part to replenish threadbare capital cushions.

The CBRC has recently read the riot act to the banks for their continued lax lending. More detailed — for which read, stricter — regulations on things like capital adequacy and leverage ratios are likely to be announced later this month or early next, once the horse trading between the regulators, the industry and the myriad of official agencies with an oar to shove in to in these particular waters, has been completed. These will bring China broadly in line with international standards, and in some cases be much tougher.

They won’t completely mitigate the regulators’ darkest fears about bad loans. The CBRC is still acutely concerned about banks’ lending to the captive investment vehicles of local governments intended to get round restrictions on direct capital raising from banks. Banks had lent at least $1.2 trillion this way to local governments as of June 30th, with 23% not backed by cash flows. The CBRC’s new rules in February were particularly tough in this regard, as they were for real-estate lending. As we noted earlier, regulators have reportedly told banks to recalculate their capital levels using higher risk weightings for their loans to local governments via captive investment vehicles. It will be a nervous-making wait for the results. As the finance ministry noted in its budget report, “local governments face debt risks that cannot be overlooked”.

How much the Party can risk slowing down the economy  to minimize the risk of a hard landing if bubbles go pop and yet still keep real living standards rising is the calculation that now has to be made in Beijing. Late last month Prime Minister Wen Jiabao set an expectation that annual growth rates will slow. He said the government would target 7% annual GDP growth for 2011-15, though it wasn’t so long ago that growth of 8% a year was said necessary to generate sufficient jobs to absorb new workers coming onto the labor market and thus ensure social stability. Diverting GDP growth into social services and income-tax cuts to offset the effects of inflation is now seen as a greater guarantor of stability than providing jobs, it appears, to a government that is seemingly increasingly if unnecessarily rattled as it enters a period of economic, political and foreign-policy transition.

Leave a comment

Filed under Economy

China Again Raises Banks’ Capital Reserve Ratios

China’s anti-inflation ratchet is clicking ever more frequently. The People’s Bank of China is again raising banks’ capital reserve-ratios. An increase of half a percentage point will come into effect on February 24th, taking the ratio to 19.5% for most large banks, and 20% for some.

It is the second time this year that the reserve ratio has been raised and eighth time over the past two years. It follows an increase in benchmark interest rates earlier this month (the third since the central bank started raising rates last October) and a January consumer price inflation number, 4.9%, which dashed any lingering hopes that inflation had peaked last November.

The central bank has been struggling to drain off the excess liquidity in the system. New bank lending in January was 1.04 billion yuan ($158 billion). The early months of the year tend to see a surge in new lending as banks clear their backlog of applications held from the previous month so they could stay in touch with their annual lending quota. But on top of the growing trade surplus swelling China’s foreign-exchange reserves and the yuan not appreciating that quickly to compensate, this means the central bank is facing an uphill battle to sterilize all those funds. We expect the click-click of the ratchet to continue.



Filed under Economy

New Bank Lending To Property Developers In Question

The big four banks hit their ceilings on new property loans for the year by the end of October and are making no more until 2011, according to state-run China Real Estate Business. This will mainly affect small and medium-sized property developers; large property firms’ borrowing, including that by state-owned developers, is weighted heavily towards the early months of the year. Real estate investment reached 3.8 trillion yuan ($572 billion) in the first 10 months of this year, up 36.5% over the same period a year earlier, according to the national statistics bureau.

We expect the central bank to cut the quota for property-development loans for 2011 as it continues to deflate the real estate bubble, while keeping overall loan limits little changed. The new-loan target for banks for this year is 7.5 trillion yuan, a sharp cut from from 2009’s stimulus-fattened 9.6 trillion yuan of new lending. So far, 6.9 trillion yuan had been committed by the end of October, according to official data.

Last month saw a larger than expected increase in new lending that, if sustained, would bring 2010’s total lending in at an above-target 8 trillion yuan. With policymakers increasingly concerned about inflation and the levels of liquidity in the economy, any money that can be drained off is being so.

Update: Xinhua reports that the big four state-owned banks, the Industrial and Commercial Bank of China, China Construction Bank, Bank of China, and the Agricultural Bank of China, say they have not suspended real-estate lending for the rest of the year, though details remain sketchy. This Bystander smells a non-denial denial. We hear that the big four are being highly selective about developments they will consider lending to, and aren’t necessarily moving at any speed even for those. So while the banks haven’t suspended new lending against real-estate development, they are just not making any loans.

Leave a comment

Filed under Economy

Shoring Up Chinese Banks’ Balance Sheets

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

Beijing Extends Lock-Up Period For Banks

The lock-up period for new foreign investors in Chinese banks is to be stretched to five years from the present three, according to Liu Mingkang, chairman of the China Banking Regulatory Commission (via Caijing). Foreign shareholders been selling what were meant to be strategic stakes in the big banks in order to bolster battered balance sheets. Bank of America cashed in part of its stake in China Construction Bank, and Royal Bank of Scotland and UBS both sold their entire stakes in Bank of China. Goldman Sachs, though, said it wouldn’t sell more than 20% of its stake in Industrial and Commercial Bank of China. Message to foreign investors: If you are coming to China, be prepared to stay awhile.

Leave a comment

Filed under Economy, Markets

Bank Of America Sells Some Of Its China Construction Bank Shares

It is scant surprise that Bank of America has, finally, sold an eighth of its stake in China Construction Bank. The sale raises $2.8 billion  — $1.1 billion of it profit on paper — and BofA needs the cash to recapitalize its balance sheet and help pay for the merger with Merrill Lynch. China Construction says it understands (statement in Chinese).

BofA will be careful to cast the sale in just such a light, and still holds a 16.6% stake in China’s second-largest commercial lender by assets.  As we’ve noted before, Beijing isn’t too thrilled to have what were meant to be foreign-owned strategic stakes in three of its largest banks being flogged off.

UBS has sold off its holding in Bank of China, and Royal Bank of Scotland and the Singapore sovereign fund, Temasek may follow suit. IPO lockups lapsed at the end of last month. Lock ups in Industrial and Commercial Bank of China, in which Goldman Sachs and American Express hold stakes, lapse in April and October. All the foreign banks need to raise capital from wherever they can.

And they are being joined by Li Ka-shing, who, Bloomberg reports, wants to sell $500 million worth of shares in Bank of China.

Back with China Construction, we assume that BofA has got round the provisions of China’s securities law that have previously held back the sale. Those ban investors holding more than 5% of a locally incorporated, publicly traded company from selling shares within six months of buying the stock. BofA’s first stake was taken in 2005 but the most recent shares were acquired only last November.

Leave a comment

Filed under Markets

China Plays Tit-For-Tat Over U.S. Banks’ Access To Domestic Market

Deutsche Bank’s newly announced tie up with Shanxi Securities to offer investment banking services is expected to get the official nod later this year. Credit Suisse has recently got approval for its joint venture with Founder Securities, the first such since the moratorium on securities joint ventures was lifted in December. But Morgan Stanley and Citigroup are still waiting for approval for their jv deals and Merrill Lynch, JP Morgan and Lehman Bros. have got no farther than discussions with potential partners.

Bias against Wall St. firms? The FT thinks it is.

What would break the logjam for U.S. investment banks?

This Bystander would wager that it would be Washington letting China’s leading banks set up and expand branch networks in the U.S. as they have wanted to do for years.


Filed under China-U.S., Economy, Markets