2013 saw a lot of changes to the mood in China, with the transition of Xi Jinping and introduction of a reform agenda, launched last month at the Third Party Plenum. There was plenty of political intrigue with the trial of Bo Xilai, endless other officials and detention of Zhou Yongkang. The first hints of the banking crisis emerged, with spikes in the interbank market in June and early December. Property and asset markets remained turbulent and tensions in Western China remained. And regional tensions escalated with the declaration of the Air Defence Identification Zone over the disputed areas of the South China Sea.
It seems fairly likely that recent interbank stress has involved non-disclosed defaults by Mainland institutions - China Everbright Bank's default during the first Shibor Spike was only revealed this month when a note in its IPO prospectus revealed two of its branches had defaulted in June, although quickly paid up (while at the time reports of branch closures and ATM shutdowns were dismissed as due to technical errors). As in June the PBOC did belatedly intervene to calm the markets with liquidity injections (a Christmas offering if you like), but there is little likelihood this pattern of crisis and belated resolution won't be repeated.
As noted on the Investing in Chinese Stocks Blog and elsewhere, the shadow banking system is rampant and a massive risk to the banking system as all manner of schemes with high and unsustainable returns have spread amidst sluggish regulated below inflation rates available in the mainstream banking system. Worse still, as has been noted before, although the entities providing such returns (trusts and other structures sold as "wealth management products") are outside the formal banking system, their products are sold to bank customers and banks either own or have exposure to the entities. The bankruptcy of mining giant Liangsheng (a coal acquisition group overburdened by debt) is an example likely to be seen more frequently and already of a scale which could threaten China's banking system. Most significantly losses track back immediately to the investors and a big state owned bank - as the FT states:
The above is the actual headline from the report of an unusual purchase by a Chinese President. Given the clear level of deference and hierarchy still in place in China, what hope is there of genuine financial reform? For example as with the PBOC, so the shipbuilding industry has also been bailed out.
The likely outcome for the Chinese financial sector in 2014?
Xie Shuizhun, a 46-year-old man from central China's Hubei province, earns his living by charging random strangers in Guangzhou's Baiyun district to beat him up, at a rate of 5 yuan (US$0.82) per punch. He insists the punches do not hurt him because he practices the ancient Chinese art of Qigong, which allows him to inflate his belly like a rubber ball.
It seems fairly likely that recent interbank stress has involved non-disclosed defaults by Mainland institutions - China Everbright Bank's default during the first Shibor Spike was only revealed this month when a note in its IPO prospectus revealed two of its branches had defaulted in June, although quickly paid up (while at the time reports of branch closures and ATM shutdowns were dismissed as due to technical errors). As in June the PBOC did belatedly intervene to calm the markets with liquidity injections (a Christmas offering if you like), but there is little likelihood this pattern of crisis and belated resolution won't be repeated.
As noted on the Investing in Chinese Stocks Blog and elsewhere, the shadow banking system is rampant and a massive risk to the banking system as all manner of schemes with high and unsustainable returns have spread amidst sluggish regulated below inflation rates available in the mainstream banking system. Worse still, as has been noted before, although the entities providing such returns (trusts and other structures sold as "wealth management products") are outside the formal banking system, their products are sold to bank customers and banks either own or have exposure to the entities. The bankruptcy of mining giant Liangsheng (a coal acquisition group overburdened by debt) is an example likely to be seen more frequently and already of a scale which could threaten China's banking system. Most significantly losses track back immediately to the investors and a big state owned bank - as the FT states:
Liansheng had little trouble finding willing lenders among China’s burgeoning shadow banks, which regulators have allowed to help plug the financing gap.
From late 2011 to early 2012, Jilin Trust, one of China’s vast array of non-bank financial institutions, sold to investors an investment product worth Rmb1bn backed entirely by loans to Liansheng.
Jilin Trust warned investors at the start of this month that the first tranche of the Liansheng loans was nearing maturity and that the mining company had yet to cover what is owed, according to China Business News, a local financial newspaper.
...Liansheng’s troubles are a reminder of the thin dividing line between China’s banks and its shadow lending industry. The Liansheng loan product sold by Jilin Trust was distributed in part via China Construction Bank, the country’s second-biggest lender by assets.
Banks tell customers they do not guarantee trust products, which offer returns far higher than traditional bank deposits, but buyers often ignore the warnings in the belief they carry the banks’ implicit backing. The Liansheng investment product targeted an annual return of 9.8 per cent.And notwithstanding the proposed interest rate liberalisation, repression in the banking system creates opportunities for the shadow banking system to flourish while as the former chief economist and spokesman of the National Bureau of Statistics in China describes it, the banking system does not work in any efficient manner at all, but rather could be run by a canine:
“Banking in China has become like a highway toll system,” Yao Jingyuan said at a Saturday summit on China’s economy held at Nanjing University. “Banks charge every time money goes through them.
"With this kind of operational model, banks will continue making money even if all the bank presidents go home to sleep and you replaced them by putting a small dog in their seats.”
Yao added that there were no longer any real bankers in China, and that most bankers had become “freeloaders” who latched onto the wide profit margin they could enjoy by taking advantage of interest differences between deposits and loans.(here).
With this sort of oversight it will be a wonder if any Chinese banks don't get into trouble next year.
In the meantime, this article will be rounded out with a couple of photographs which seem to capture the mood at the moment.
"President Li buys his own steamed buns"
The likely outcome for the Chinese financial sector in 2014?
Xie Shuizhun, a 46-year-old man from central China's Hubei province, earns his living by charging random strangers in Guangzhou's Baiyun district to beat him up, at a rate of 5 yuan (US$0.82) per punch. He insists the punches do not hurt him because he practices the ancient Chinese art of Qigong, which allows him to inflate his belly like a rubber ball.
Back in 2014!
