Why China's banking system is in so much trouble

(16-02-2014, 05:50 PM)BeDisciplined Wrote: Hi Freedom,

I am no finance trained. But isn't US the only country in this world that can print money to get itself out of trouble? If every country can do that, why would Ireland and other European countries needed to borrow from IMF during the GFC? Also back in 97/98, why can ASEAN countries print lots of money to pay back debts and get themselves out of trouble? When US government issue treasuries etc to inject liquidity into the banking system, there must be willing buyers of these treasuries and bills. Their balance sheet also needs to be balanced, right? Could any 3rd world country print money to get itself out of trouble? Who would want to buy and throw good money after bad? IMHO, as long as RMB is not freely traded, they can better manage the problem at home. Once RMB is freely traded, there could be free flight of funds and open to foreign speculative attacks ...recall George Soros attacks during Asian Financial Crisis.

Charlene Chu graduated from Yale.

For AFC, it is different because at that time, a lot of companies borrowed foreign currency denominated debt instead of local currency denominated debt. You can read more about my reason in this thread. http://www.valuebuddies.com/thread-4576.html What the Thai government or Indonesia government required to save their economy was USD, not Thai Baht or Indonesian Rupia. And they could not print USD and they did not have the bargaining power to convert those foreign currency denominated debt into local currency denominated. Similar problem happens in Argentina or the Russian default in late 1990s if I am not wrong.

For the Chinese government bail out if there is going to be one, it is much simpler. Most of the debt incurred is domestic lending which is in RMB. PBOC, as any central bank, has the power to create unlimited amount of RMB. To save domestic financial institutions, not those subsidiaries incorporated in foreign jurisdiction, RMB is required, not foreign currencies and PBOC has the power to create unlimited amount of RMB, so no problem at all. As for capital flight, it depends on supply and demand too. If a huge demand of foreign currencies and a huge supply of RMB is available in the market, the exchange rate will fall dramatically. Some of them can get a good exchange rate and the rest will get lousy exchange rate. It is a difficult situation to manage, but it can be done orderly.

After AFC, USD/IDR dropped from 2,000 to above 10,000. the smart money got out at 2,000 and they made huge profit. But the rest of dumb money got out at above 10,000. On balance, the smart money was mostly taking advantage of the dumb money, not the central bank of Indonesia assuming the Indonesia central bank was competent at that time, not stupid enough to think they can cover it with their foreign reserve.

I am not clear how all this money printing works but one thing I know is if any country print money the currency will devalue. Even US currency is now very devalued with all their stimulus.

So far as I read only UK has some RMB for trading.

So most of RMB value is tied up in their foreign reserve in USD.

So if china "print money" or capital inject or make something from nothing to save those defaulted large banks then RMB will become even more devalued and eventually become "pang sai chua" just like indonesian rupiah.

The Fed has printed trillions of USD, how much has USD devalued? It all depends on the economic power of the country. Most of countries does not really care much about Indonesia, how many companies really need Rupia? Rupia can drop to 20,000 or rise to 1,000 per USD, the US probably does not care.

Plus, if money printed is managed properly, there is no loss of value in currency. Soon, the world will realize that from the USD. The USD is going stronger.

(16-02-2014, 07:01 PM)freedom Wrote: The Fed has printed trillions of USD, how much has USD devalued? It all depends on the economic power of the country. Most of countries does not really care much about Indonesia, how many companies really need Rupia? Rupia can drop to 20,000 or rise to 1,000 per USD, the US probably does not care.

Plus, if money printed is managed properly, there is no loss of value in currency. Soon, the world will realize that from the USD. The USD is going stronger.

USD is only holding strong as they are the base currency for trading plus as you mentioned they have quite a big GDP 16.8billion/year.

However if you check the charts from before,

8 yrs ago USD to SGD was above 1.60, now its below 1.30. Similiar story against the Swiss Franc 1.3 drop until 90cents. (both countries did not stimulus/print money after the last GFC. That's about > 20% hit.

Partly could be due to deterioration of US economy, but in large part I suspect its from all the Quantitative Easing.

SGD is not a good indicator. Singapore imports a lot from surrounding countries, which most of their currencies has risen against USD. SGD could choose to rise together with them or suffer higher imported inflation. As the emerging Asian economy gets better, the currencies will become stronger. The more goods and services a country produced is demanded by the rest of the world, the more demand of its currency from the rest of the world. Naturally, the currency will appreciate against the rest of the world.

If compared with all the currencies traded, USD has not exactly lost much value. It only loses value against some small currencies, such as SGD, Swiss Francs, which is really used by a very small economy and a small part of US trades and large one, probably only CNY, but I think soon CNY will depreciate against USD once the Chinese economy slows down further. It's more fair to compare which countries and currencies US trades most against.such as Canada and CAD, China and CNY, Japan and JPY, EU and EUR, Mexico and MXN, etc. You check the countries here. http://www.census.gov/foreign-trade/stat...312yr.html

I would like to add to freedom's viewpoint. Most of Chinese big corp are state owned. Which means that most of the wealth in the country is controlled by gov. During years of housing boom, money from land sales, housing projects, or whatever smart or dumb projects the local gov do, a big part of the money still flow into state owned companies.

If crisis strikes, gov will just pump back the money they earned during the boom times. Hence I'm not worried about a Chinese banking crisis.

He defended the government’s decision to bail out the troubled trust fund, saying bankruptcy is not necessarily the only solution to credit default.

“I support the decision to bail out Credit Equals Gold and it gives due consideration to the interests of all parties including the potential impact on social stability,” he said.

After all the talk - still turning to printing $ as an easy way out...


China Construction Bank chief Wang Hongzhang downplays credit risk
PETER CAI BUSINESS SPECTATOR FEBRUARY 17, 2014 11:20AM

THE chairman of China Construction Bank Corp, Wang Hongzhang, has downplayed concerns over the stability of the country’s financial system, saying the overall risk is modest.

The bank, which ranks the seventh largest in the world with nearly $2.5 trillion in assets, is expanding rapidly overseas. And it just added an ATM to its Melbourne branch over the weekend, the first outside of the Greater China region.

Mr Wang, who is an alternate member of the powerful Central Committee of the ruling Communist Party of China and a former senior official of the central bank, told Business Spectator in an exclusive interview that the country’s shadow banking system did not pose serious a problem.

“The biggest issue for the country’s shadow banking system is whether it is part of China’s prudential regulatory system,” he said. “The shadow banking systems, which include trust, managed funds and private wealth management products, are under adequate supervision.”

China’s shadow banking system (off-balance sheet lending) is estimated to be 46 trillion yuan, or 30 per cent of the assets of traditional banks, according to JP Morgan. Many investors and analysts regard the country’s shadow banking sector as one of the biggest threats to the economy.

Credit Equals Gold, a 3 billion yuan trust product, was on the verge of bankruptcy at the beginning of this year but it was bailed out by the government. Many economists including Yiping Huang, a former chief China economist for Citi Group and Barclays, regarded the bailout as a missed opportunity to reinforce the problem of moral hazard.

“The 3 billion yuan bad debt from Credit Equals Gold should not come as a surprise and it is quite normal. The proportion of bad debt from the multi-trillion trust product industry is even lower than the non-performing loan sitting on banks’ balance sheets (which is less than one per cent),” Mr Wang said.

The chief of China’s second largest lender believes the best way to manage the looming problem facing China’s 11 trillion yuan trust industry is to raise risk awareness and clearly demarcate responsibility in the event of default.

“Investors think banks should bear the responsibility and banks believe investors should bear the cost of default,” he said. “Chinese investors don’t have adequate understanding of risk. I think investors of trust products should be responsible for their own investment decisions.”

He defended the government’s decision to bail out the troubled trust fund, saying bankruptcy is not necessarily the only solution to credit default.

“I support the decision to bail out Credit Equals Gold and it gives due consideration to the interests of all parties including the potential impact on social stability,” he said.

Nearly one third of China’s 11 trillion yuan trust products are due this year. Experts are predicting selected defaults are inevitable.

Mr Wang, a former central banker, says China’s more modest economic growth target of 7.5 per cent would be conducive to implement the country’s far-reaching reform package announced at the end of last year, which includes interest rate reform.

For a long time, Chinese banks have been able to earn handsome return from the country’s artificially low deposit rates, known as financial repression. However, the Chinese central bank has indicated strongly that liberalisation of interest rates is only matter of time.

“The impact on our profitability will be enormous and that is why we need to diversify our revenue streams. It is a must for all commercial banks in China,” he told Business Spectator. “Fifty per cent of our profits come from traditional lending activity and we are expanding into securities, investment banking, private wealth management, leasing and trust fund management.”

(17-02-2014, 12:22 PM)greengiraffe Wrote: He defended the government’s decision to bail out the troubled trust fund, saying bankruptcy is not necessarily the only solution to credit default.

“I support the decision to bail out Credit Equals Gold and it gives due consideration to the interests of all parties including the potential impact on social stability,” he said.

After all the talk - still turning to printing $ as an easy way out...

How much has been printed? Do you have any evidence to support such allegation?

(17-02-2014, 01:15 PM)freedom Wrote:

(17-02-2014, 12:22 PM)greengiraffe Wrote: He defended the government’s decision to bail out the troubled trust fund, saying bankruptcy is not necessarily the only solution to credit default.

“I support the decision to bail out Credit Equals Gold and it gives due consideration to the interests of all parties including the potential impact on social stability,” he said.

After all the talk - still turning to printing $ as an easy way out...

How much has been printed? Do you have any evidence to support such allegation?

I don't know the answer. Printing $ is the typical method that central bankers used in bailout situation.

I have long content that Chinese banking sector is a closed system and hence what happens behind closed doors only the insiders know.

Till now Chinese economic system has been largely closed including their social media - this is mainly to ensure control in a globalised free flowing environment.

Anything to do with Chinese must be viewed from a different perspective.

I apologised for my usage of words in my comments if it appears misleading in any sense to anyone.

GG

调查：一万元存五年利息一万二 陷阱还是馅饼？
http://m.news.cntv.cn/2014/02/17/ARTI139...9244.shtml

http://investideas.net/forum/viewtopic.p...&start=120