Chinese financial sector: there be storms and shaols

(Backgrounder: Temasek has biggish stakes in three out of the four major  Chinese banks: doesn’t have shares in Agricultural Bank and CapLand is big and bullish on China).

Credit issues in Pearl Estuary region:  http://blogs.reuters.com/breakingviews/2013/03/27/chinese-credit-alarms-sound-in-the-east/

And New rules will force mainstream lenders to cap their exposure to some of the riskier off-balance sheet products they have sold to customers – in particular, those that are effectively repackaged corporate debt. That limits a big source of risk for banks, but creates a new one for the Chinese economy.

http://blogs.reuters.com/breakingviews/2013/03/28/china-shadow-bank-curbs-attack-symptom-not-cause/

The junk bond market in China took off this year. Although the deals still account for a small share of the global total, Chinese companies have sold $8 billion of high-yield bonds to overseas investors since January. That’s up from $2.3 billion during the same period a year earlier, according to figures from Dealogic … the Chinese market has its own set of potential problems, and some analysts worry that investors aren’t being properly compensated for the added layer of risks.

he bulk of the high-yield bonds in Asia this year — roughly half — come from Chinese real estate companies. The fear is that the housing market, which has been booming, is a bubble that will eventually burst.

Mainland China’s domestic bond market remains largely off limits to foreign buyers. So most investors buy offshore Chinese bonds, which are issued through holding companies headquartered in places like the Cayman Islands.

The bonds tend not to be backed by the actual businesses and underlying assets in mainland China. That means foreign bondholders may have little legal recourse if a company defaults on its debt, especially if local banks or other Chinese creditors make claims.

Bondholders are now facing such difficulties with the bankruptcy of Suntech Power.

http://dealbook.nytimes.com/2013/03/28/as-pace-of-chinas-junk-bond-sales-grows-so-do-worries/?nl=business&emc=edit_dlbkpm_20130328

Reasons why Cina banks deserve their deratings

 http://blogs.reuters.com/breakingviews/2012/10/30/three-reasons-chinas-banks-deserve-their-derating/

For the record, Temasek has big stakes in three of the four biggest banks. Cheong all the way?

Temasek: Rebalancing its Chinese bank portfolio

Last month, Temasek bought US$2.3bn worth of shares in Industrial and Commercial Bank of China (ICBC), taking its overall stake in the bank to 1.3%. I commented that it was increasing its bet on the big Chinese banks (it owned big stakes in three of them) when the mood on them was getting bearish.

Well it is now sell US$2.4bn worth of its shares in Bank of China and China Construction Bank.

So overall, it is reducing its stakes in BoC and CCB (locking in some profits: it got into these at very attractive prices as a cornerstone pre-IPO investor) while adding a stake in ICBC to the mix at a slight discount to the market.

Update on 4 May 2012 at 3.10pm: More details http://www.bloomberg.com/news/2012-05-02/temasek-selling-2-4-billion-in-boc-china-construction.html

Temasek’s Chinese banks have an unending appetite for capital

Regular readers will know that Temasek’s investments in Bank of China and China Construction Bank are great investments. It came in as a pre-IPO cornerstone investor and unlike the Western banks that had similar status had not sold out. Gd friend of China. It trades out and in of these stocks to make realised profits. But these trading profits are peanuts as the trading positions are peanuts in relation to its holdings in these banks

And that it recently bot Goldman Sach’s remaining stake in ICBC, at a slight discount to its mkt price. 

As this article explains these banks have an unending appetite for capital because they are “squeezed for capital”. So Temasek has to be willing to cough up more of our money if it wants to avoid being diluted when rights issues are called.

Analysing Temasek’s investment in another Chinese bank

Temasek has agreed to buy Goldman Sachs’s shares in the Industrial and Commercial Bank of China (ICBC), the world’s largest bank. It will buy US$2.3bn worth of ICBC shares, taking its stake to 1.3% in the bank.

In an interview with Reuters at the end of March, Ho Ching’s presumed successor-in-training, Temasek’s head of portfolio management,acknowledged the heavy allocation to financials, but noted that it holds four very good banks: Bank of China, China Construction Bank, DBS Group and Standard Chartered. Well it has added ICBC to this list, and at a price close to the market price, unlike the stakes in the other two Chinese banks where it got a “special” price as a pre-IPO cornerstone investor.

But is it a wise move?

True, since the lows last October of the Chinese and HK stock markets, the shares of the four leading Chinese banks (including Bank of China, China Construction Bank and ICBC) have gone up by more than half, easily outperforming the broader market.

But since March, prices have been off (but masked by general market falls) because of concerns abt China’s growth, bad loans and comments by the  Chinese PM, Wen Jiabao, who hinted  of breaking the monopoly state-owned lenders have enjoyed in China’s banking sector. (The sector is dominated by four big state-owned banks and Temasek now has significant stakes in three of them.)

Mr Wen said that their monopoly was hurting businesses in the country, as they had few options to raise capital.

“Frankly, our banks make profits far too easily. Why? Because a small number of major banks occupy a monopoly position, meaning one can only go to them for loans and capital,” he was quoted as saying by China National Radio. “That’s why right now, as we’re dealing with the issue of getting private capital into the finance sector, essentially, that means we have to break up their monopoly.”

The lack of easy availability of capital has often been cited as threat to growth of small and medium-sized businesses in China. There have been fears that some of these businesses, seen as key to China’s growth, may turn to unofficial sectors for capital, increasing their borrowing costs substantially

But Temasek could be betting on, “Wen has one year left [in his term].” This was said by an unnamed Chinese state banker quoted by Reuters. “This is a task for the next generation of leaders. It cannot be accomplished within one year.”

But the banker could be wrong, Wen could be telling us what has been agreed upon between his generation and the next generation of leaders.

Remember, It took a beating on its finance industry holdings after the 2008 crisis, losing about $5 billion in stakes held in Barclays and Merrill Lynch, now part of Bank of America. It has since trimmed its financial holdings by 4 percentage points to 36 percent of the portfolio. Last month, it sold a 1.4 percent stake in India’s No.2 lender ICICI Bank. From said Reuters reported.

And of the remaining two “very good banks” where Temasek has significant stakes, DBS has juz decided to buy Temasek’s stake in Bank Danamon. Management will now be preoccupied with getting the deal approved by the Indonesian authorities, then integrating the bank into DBS. Before this deal, management had finally got to grips with DBS’s operational problems. The danger is that the focus on the Danamon deal may lead to backsliding in the area of operatons.

The genuine jewel is StanChart, but by global standards, it is “peanuts”.

Temasek: Where things can go wrong.

Credit Suisse analyst Sanjay Jain said in a report last week that he thinks that up to 12%  of all of China’s outstanding loans may go bad and non-performing loans may likely account for all of the banks’ equity. Current NPL ratios hover at around 1% or the top Chinese banks.

Ops a daisy. As Temasek has major (and so far very profitable) stakes in two of China’s top four bank, Bank of China (4%) and Construction Bank of China (7%), predictions such as this (and Credit Suisse is not alone, just the latest and most pessimistic) should worry S’poreans.

As Temasek got the initial substantial stakes at bargain prices (courtesy of the Chinese government), selling part or all these stakes requires Chinese approval. At a time when the Chinese government is supporting the shares of the major four banks, such approval is unlikely.

Not another debacle like Shin, ABC Learning, Merrill Lynch or Barclays in the making?

Temasek the hedge fund?

A consortium that includes Temasek and its wholly owned hedge fund Seatown Holdings has acquired a 5% stake in China Construction Bank it was reported on 30 August 2011

It had unloaded a portion of its own stake in the Chinese lender about a month ago, when, by my calculations, the price of CCB shares was  abt 10% higher. And given that it bought the latest batch of shares at a discount, Temask could have made 20% on the sale and repurchase.

Gd trade.

Description of trades

http://www.nytimes.com/reuters/2011/08/30/business/business-us-bankofamerica-ccb.html?nl=business&emc=dlbka32

S’poreans, Temasek may have a problem

Of the 90 publicly listed Chinese property developers listed on the Shanghai and Shenzhen stock exchanges, almost two-thirds of them reported negative operating cash flows for the first half of 2010.

This makes clear why the Chinese authorities had earlier asked the banks to use a 60% haircut in estimating residential property  losses.http://atans1.wordpress.com/2010/08/11/temasek-what-abt-these-chinese-property-charts/

Looks like trouble for the Chinese property developers and banks may be coming sooner than later, and for China bank bull Temasek. A repeat of Merrill Lynch and Barclays?

Remember Temasek owns 4% of Bank of China; and 6% of  China Construction Bank. And StanChart is a cornerstone investor  in Agricultural Bank of China with abt 1% paying US$500m for this privilege). Temasek owns 18% of StanChart.

And what about CapLand and KepLand, with their biggish exposure to Chinese residential properties?

Sigh

Dogs? Temasek’s Chinese bank investments

Might sound dumb to ask given that the Chinese banks that Temasek invests in are some of the largest in the world, and given that China’s economy is growing like the bean stalk in the story Jack and the Bean Stalk.  But then Shin, Merrill Lynch and ABC Learning were “no brainers”.

State agency Central Huijin Investments did something strange recently. It has controlling stakes in nearly all of China’s largest banks, including China Construction Bank (6% owned by Temasek), Agricultural Bank of China (StanChart is a cornerstone investor with abt 1% paying US$500m for this privilege) and Bank of China (4% by Temasek) . Temasek owns 18% of StanChart.

Huijin just raised Rmb40bn (US$5.9bn) as part of  a Rmb187.5bn fund raisng. The aim of raising the Rmb187.5bn is to recapitalise  Chinese banks it controlled.

Sounds prudent given the explosive loan growth rates of the banks brought about by Chinese attempts to stimulate the economy.

But this is the weird bit: the state-controlled banks were estimated to have bought more than 80% of Huijin’s first bond issue, on orders from their shareholder. If this is repeated, this means the Chinese banks are lending money to their controlling shareholder so that the shareholder can buy shares in them.  No new cash is invested by the controlling shareholder.

Sounds something that only Wall Street cowboys would dream of doing.

Except that the Wall Street cowboys would be in jail for pulling off this stunt, unless of course, if a Texan is president.

Temasek: China banks’ loans

Chinese banks may struggle to recoup about 23%  of the Rmb7,700bn (US$1,100bn) they’ve lent to finance local government infrastructure projects . reports Bloomberg quoting “a person with knowledge of data collected by the nation’s regulator”.

The estimate implies US$261bn of debt will go bad, almost five times the US$53.5bn the nation’s five largest banks are raising to replenish capital. Remember Temasek owns 4% of Bank of China and 6% of China Construction Bank, both of which have raised more capital from shareholders.  And 18% -owned StanChart  invested $500 million in Agricultural Bank of China’s recent IPO.

If the estimate proves even a bit correct, Temasek will be having to invest more in the next few years  to avoid dilution.

Related post

http://atans1.wordpress.com/2010/02/08/tlcs-in-china-groupthink-or-mastermind-at-work/

Temasek: Update on its China bank investments

As readers will be aware Temasek has strategic stakes in Bank of China (4%) and China Construction Bank (6%), two of the four biggest Chinese banks.

These investments have done well, but need cash because of the loans they were directed to make last year, when China wanted domestic demand to make up for weak exports. http://atans1.wordpress.com/2010/04/14/temask-profitable-holdings-require-more/

China Construction Bank has announced a plan to boost a balance sheet that has been eroded by a year-long lending binge. The world’s second-largest lender by market value, plans to raise up to Rmb75 billion (US$11 billion) from a rights issue which, if successful, will be the largest offering of its kind in Asia.

CCB will offer 0.7 rights share for every 10 existing A- and H-shares. The price will be no more than Rmb4.50 per rights share, according to a stock exchange filing on Thursday night last week.

Under the plan, approximately 16.36 billion new shares will be issued, of which 15.7 billion will be Hong Kong-listed H-shares directed to overseas investors. Only 630 million are Shanghai-listed A-shares earmarked for mainland investors. The proposal is pending shareholder and regulatory approvals.

Bank of China  announced plans to sell U$5.8 billion worth of convertible bonds sometime back and we shall see if it needs more cash*.

AND Chinese banks, flush from record profits that were bolstered by a yearlong lending binge, are expected to face a business slowdown as Beijing tries to slow lending to keep the economy from overheating.

Full article from NYT.

Update

Industrial and Commercial Bank of China, the world’s largest bank by market value, and Bank of China, the country’s third largest lender by assets, are reconsidering previously announced plans to sell convertible bonds and new shares in Shanghai and Hong Kong, according to analysts and Chinese media reports. The banks might be under pressure from to sell shares through a rights issue to existing large shareholders and by selling more shares in Hong Kong than in Shanghai, as a means of stabilising the Shanghai market.

Temask: Profitable holdings require more $

Err the SDP and its new media allies will spin this as: “Profitable investments — requires more money. Waz happening Temasek?”

As you will be aware Temasek has stakes in two Chinese banks; 4% in Bank of China, and 6% of  China Construction Bank Corporation. These stakes are profitable.

But Temasek would need to invest more if it wants to maintain the size of its stake because they need a lot more capital.

China’s four biggest publicly traded banks (Industrial and Commercial Bank of China, Bank of Communications , Bank of China, China Construction Bank ) could face a combined capital shortfall of at least Rmb480bn (US$70bn) over the next five years, according to the president of Industrial and Commercial Bank of China, reports the FT.

All these banks have announced plans in the past month to raise fresh capital after orders to lend liberally last year. But the total amounts they plan to raise fall far short of the five-year estimate of Yang Kaisheng, ICBC president.

Poor Temasek: nothing satisfies critics gunning for you.

Temasek and China’s Bad Loans

Temasek has big holdings in two Chinese banks: 4% of Bank of China and 6% of China Construction Bank.

So this is worrying: “For the banks themselves, the lending splurge threatens to undo significant progress made in recent years in reducing ratios of problem loans to total lending.” Part of of an IHT article.

It goes on:

“A decade ago, Chinese banks staggered under a load of bad debt, reported by the Bank of China at nearly 40 percent of their total lending in 1999. In 2000, the nonperforming loan rate for the major commercial banks in China stood at 29 percent, according to official statistics and in the view of many Western analysts who questioned Chinese accounting standards, it was probably far higher. Nonperforming loans are defined as those on which repayments are more than three months in arrears.

‘The government vowed to bring the rate down to 15 percent by 2005, and by the end of 2007 it had dropped below 7 percent. One factor behind this reduction was the need for Chinese banks to attract investment from private and foreign sources.

‘This steep decline to single-digit levels would seem to tell a heroic tale of a banking system that solved its problems, but not all analysts take it at face value. Skeptics say the cleanup was largely based on sleight of hand, involving specially established asset management companies, speculative bonds and fuzzy government guarantees that together did little more than kick the problem down the road.

‘Even the least cynical analysts acknowledged that lower ratios partially reflected the dilution of bad loans in a vast sea of new lending, some of which would go bad but was still too recent to register as nonperforming.

‘Yet such doubts and qualifications notwithstanding, few deny that some degree of bad debt reduction was genuine and that overall loan quality among Chinese banks has improved from the worst of times.

‘Now, however, new concerns are emerging over the state of Chinese banks and their balance sheets. Zhou Xiaochuan, governor of the People’s Bank of China, the country’s central bank, spoke publicly of such worries in early January, and hinted at a lending slowdown.

‘Large credit flows, “will not only go against the objective of economic structural adjustment, but will also pose bank lending quality risks,” Mr. Zhou said in a magazine interview.”

Note that the Bank of China said on Friday that it plans to sell up to Rmb40bn ($5.86bn) of convertible bonds toto boost its capital base and allow it to meet stricter regulatory and capital requirements following.In 2009,  Chinese banks lent a total of Rmb9,600bn, more than double the volume of new loans made in 2008.

Note also that the announcement came just after the authorities acted to check  surging loan growth by ordering some banks, including Bank of China, to temporarily suspend the granting of new loans.

As you will be aware, Beijing is worried about rising inflationary pressures and the  quality of new loans, the by-products of its expansionist economic policies.

Update 25/1/09

BOC  told analysts it may raise additional capital by selling new shares in Hong Kong, in addition to the U$5.9bn Chinese convertible bond sale.
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