THE EXEMPLARY DEFAULT of a high-yielding wealth management product was always going to have to be carefully managed. The default would have to be painful enough to instruct Chinese investors that their assumption that high-yielding investments sold through state banks carry an implicit guarantee is misplaced, but not so painful that it put the shadow banking system at any sort of systemic risk that could ripple through to the mainstream financial system. With China’s trust assets increasing 46% last year to a record 10.9 trillion yuan ($1.8 trillion), it could potentially be a powerful ripple.
But the best laid plans of man, and all that…
With China Credit dodging the bullet, what appears to be the trust company fated to play the fall guy, Jilin Province Trust Co. Ltd, sold a number of high-yielding trust products through China Construction Bank, the funds raised going to a now delinquent coal company, Shanxi Liansheng Energy. Last week, state media reported that Jilin Trust had failed to pay off 763 million yuan of maturing high-yield investments it sold to China Construction Bank clients. It now appears that, according to the official China Securities News, it is just one of six trust companies who lent a total of 5 billion yuan to Shanxi Liansheng.
The concern is that their exposure could trigger similar defaults, and what was intended to be an orderly default, turns into something altogether more panicky within the shadow banking system. Beyond the inherent undesirability of that, it would put the big state-owned banks in an awkward position. They are not under a legal obligation to repay investors who bought trust products through them, but they may feel a need to do so — or be made to feel a need to do so — in order to maintain their reputations (if the pressure is from below) and uphold social stability (from above).
For now, it seems that provincial officials are working on a debt restructuring for Shanxi Liansheng to forestall things getting out of hand. The coal company was said last year to owe as much as 30 billion yuan. The restructuring discussions involve not just creditors but also the trust companies and the state owned banks. This Bystander suspects the banks will end up extending new loans to the coal company that can be used to pay off the trusts. Not at all the lesson intended. If anything, quite the reverse.
China Construction Bank, one of the two of the big four state-owned banks that fell below the regulators’ required capital adequacy ratios in March, is scaling back its rights issue to 61.7 billion yuan ($9.2 billion) from the originally proposed 75 billion yuan. The bank has just got regulatory approval to go ahead with the capital raising in Shanghai and Hong Kong. China’s big banks have been arm-twisted into raising new capital to shore up their balance sheets and meet new capital adequacy ratios as Beijing frets about possible bad debts coming back to haunt them after the stimulus-fed new lending spree of the past two years. The modest scaling back of the rights issue and record quarterly earnings announced last week by the largest state-owned banks suggest such anxieties may be easing, if only a tad. The great unknown remains what bad debt lurks in the unregulated underground banking system that operates at the county and city level and where as much as 20% of the loan assets of China’s banks lie.
Filed under Economy, Markets
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
The lockup agreement expires tomorrow on a third of Bank of America’s 16.7% stake in China Construction Bank. Will it sell? The U.S. bank will also find out the same day the result of its stress test. Reuters is reporting that it will need an additional $34 billion of capital. Selling the CCB stake would raise more than $8 billion based on current market prices, its shares having out performed the broad market over the past week. BofA has said it wants to remain a strategic long-term shareholder in CCB, and would still hold more than 10% if it sold the unlocked shares, but short-term imperatives are weightier considerations right now.
Filed under Economy, Markets
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.