atans1

Ho, Ho, Ho: Chinese banks rights issues are a’coming

In Uncategorized on 29/05/2015 at 1:16 pm

(Update at 2.10pm

A state-owned investment firm also said it sold shares in the top four banks*.

Central Huijin Investment confirmed it sold some mainland-listed shares in China’s top four banks and other financial institutions, along with Exchange Traded Funds (ETFs).

Temasek has stakes in three of them.)

Why Chinese banks will be needing more capital sooner than later. As a big investor in Chinese banks, Temasek will be subscribing to rights issues, lots of them, on banks that have underperformed their US, ang moh and SE Asian peers.

Ho Ho Ho

A group of 14 Chinese banks that Fitch Ratings analyses has a combined 20 trillion yuan ($3.3 trillion) exposure to property, four times the 2008 amount. More than half of this sum is corporate credit with property as collateral. Just like in Japan in the 1990s, it’s not clear if all Chinese banks have enough loss-absorbing capital to withstand a big shock to property prices.

It stretches credulity that in a sharply slowing economy where total credit is estimated by Fitch to have ballooned to 242 percent of GDP by the end of 2014, and where interest costs this year would amount to 15 percent of GDP, only 1.4 percent of bank loans have gone bad. But then, the non-performing loan number is meaningless because 38 percent of the overall credit risk resides outside banks, in Fitch’s estimate. But just because the dodgiest loans are hiding in the shadow banking system doesn’t mean that losses on them won’t find their way back to the banks.

China’s lenders have a head start. Many have been raising capital in the market to pad out their loss-absorbing capacity. But more might be useful, so that when the heavy losses come, the more efficient borrowers aren’t forced out of the market. China might also need to revisit the law that stops banks from lending more than 75 percent of their deposit base. Allowing zombies to exist in suspended animation rather than die suddenly can help minimize mass unemployment and social unrest, but the cost mustn’t be borne by more productive sectors.

http://blogs.reuters.com/breakingviews/2015/05/26/japan-lesson-on-china-debt-extend-dont-pretend/

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