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Saturday, 15 February 2014

The biggest loser?

The start of 2014 has seen a flood of commentary regarding the Chinese non-bank (trust) financial sector - with the last minute bailout of the oddly named "Credit Equals Gold" trust fund (sold through ICBC branches) in late January and a number of predicted defaults of trust funds linked to the coal sector (or actual default in the case of Jilin Trust) in February. As Bloomberg notes, yields on debt securities are also rising making finance more expensive for businesses in China, but the borrowing binge is continuing, with the FT reporting the highest rates of lending in four years (and a flood of new entrants into the trust and wealth management sector).

As longtime financing expert Charlene Chu has noted, there is increasing currency risk in the system as more borrowers resort to offshore lending.  In the same article in the Telegraph, George Magnus of UBS notes the similarity with Japan before its crash in the 1980s.  Unhelpfully as Ambrose Evans-Pritchard notes in his Telegraph comment piece, this is occurring amidst a policy of monetary tightening and contraction as the administration in China tries to rein in the heady boom of the last decade.

Notwithstanding the current focus on losses within China it is interesting to note some consideration being given to just how much will be lost by foreign lenders.  As Sean Darby, an equity strategist at Jeffries has noted there is significant exposure not only in Hong Kong (China's primary offshore investment centre), but in the banks of Australia, Europe and elsewhere.  It doesn't help that in Australia's case, the large domestic banks which are stuffed high with local real estate loans, desperate for growth opportunities are now aggressively moving into the Chinese market (see also here).

The below chart from Bloomberg (full size image here) shows the rapid growth of foreign lenders' exposure to China and in particular it is interesting to note the high exposures of British, French and Australian banks.  This may be something they come to regret.

(c) Bloomberg


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