ICBC : Industrial and Commercial Bank of China (1398)

[grubb]

The exact statistics here

http://english.unirule.org.cn/Html/pub/2...25531.html

Yes, SOEs are profitable, but without state subsidies most of them will be running in red ink. As China abandons the growth model and rebalances the economy, one way to do so would be to raise interest rates to stop value destroying investments.

The link above states =>

SOEs are also subsidized via preferential financing costs on loans from state banks. On average, SOEs pay a real interest of 1.6% on loans, while the market interest rate is 4.68%. If we work out the interest that SOEs should have paid according to market rates, the total interest difference amounts to RMB 2296.7 billion from 2001 to 2008, accounting for 47% of the total nominal profits made by SOEs.

[freedom]

This is not the beginning of 21st century any more.

As recently reported, the big 4 banks alone earn more than the rest of all private enterprises listed in China stock market.

So the profitable SOEs can't cover the small number of loss-making enterprise?

There is no reason for the SOEs to pay market rate. Do you expect Temasek to pay the same interest rate as some nobody SMEs?

[grubb]

This is not the beginning of 21st century any more.

As recently reported, the big 4 banks alone earn more than the rest of all private enterprises listed in China stock market.

So the profitable SOEs can't cover the small number of loss-making enterprise?

There is no reason for the SOEs to pay market rate. Do you expect Temasek to pay the same interest rate as some nobody SMEs?

One hallmark of the growth model is through financial repression, through which wealth is transferred from the household sector to the state. In China the central bank has set caps on the deposit rates above which the banks cannot pay, and floors below which banks cannot lend. In fact, including inflation depositors are getting negative interest rates. It is no wonder that banks are making as much as profits as they are.

http://www.knowledgeatwharton.com.cn/ind...nguageid=1

This period of fat spreads for banks is now ending. Do a simple google search and you will see that the central bank is moving to liberalize interest rates.

Even if you assume that SOEs do not get preferential rates below the benchmark rate, the interest rate is still ridiculously low for a country growing at double digits in the past (and now at 7.7%).

Financial repression (along with cheap land, tax breaks etc) also means that outsized SOEs profits are subsidies from the household to the state. Although household income has increased significantly, consumption as part of GDP has fallen to only 30%+.

If China is to rebalance towards a consumption driven economy, SOEs must take the hit. Rebalancing is essential because the end of the growth model is typically characterized by runaway credit and value destroying investment (think Japan, Brazil). Saying that SOEs should enjoy preferential rates is like saying households should continue subsidize the state sector. A rebalancing will never occur in that case.

[CityFarmer]

If China is to rebalance towards a consumption driven economy, SOEs must take the hit. Rebalancing is essential because the end of the growth model is typically characterized by runaway credit and value destroying investment (think Japan, Brazil). Saying that SOEs should enjoy preferential rates is like saying households should continue subsidize the state sector. A rebalancing will never occur in that case.

I concur. That is the big picture I got. The rebalancing is on the way, and well-planned.

[create8value]

Apology if I digress a little from the discussion. I hope to share something about "Shadow banking". There's a lot of fear generated by Western media about the word "Shadow banking". It should be called "Parallel banking" instead. The Chinese debt market is immature, a lot of SME are unable to tap the bond market. The big lenders are unwilling to lend it to them, as they are unsure of the SME's credibility.

Then SOE act as the middle man, as they may understand the SME better through business connections. The big banks will then lend to SOE, which then sub-lend to SME at higher interest rates.

In case of crisis, many SME may default. SOE will take the first blow, the big banks will take 2nd if the SOE collapse. Many SOE in China are highly profitable due to the special treatment they have over the years. In case of crisis, the SOE can tap on reserves, bonds or bank borrowings to plug the hole. It's not so easy for SOE to fall.

[Wildreamz]

I think the big picture here is, is the stock undervalued right now, given the uncertainties in the future NPLs.

Whether or not the growth of SOEs will take the hit seems not as important, as we more or less know that most SOEs will be able to repay their loans (not contribute much to NPL) as long as they do not go bankrupt (they don't have to be profitable, they just need to break even).

ICBC just need to remain at their current earnings for investors at the current price to reap a good return (with 6% dividend to boot).

[GFG]

This is not the beginning of 21st century any more.

As recently reported, the big 4 banks alone earn more than the rest of all private enterprises listed in China stock market.

So the profitable SOEs can't cover the small number of loss-making enterprise?

There is no reason for the SOEs to pay market rate. Do you expect Temasek to pay the same interest rate as some nobody SMEs?

One hallmark of the growth model is through financial repression, through which wealth is transferred from the household sector to the state. In China the central bank has set caps on the deposit rates above which the banks cannot pay, and floors below which banks cannot lend. In fact, including inflation depositors are getting negative interest rates. It is no wonder that banks are making as much as profits as they are.

http://www.knowledgeatwharton.com.cn/ind...nguageid=1

This period of fat spreads for banks is now ending. Do a simple google search and you will see that the central bank is moving to liberalize interest rates.

Even if you assume that SOEs do not get preferential rates below the benchmark rate, the interest rate is still ridiculously low for a country growing at double digits in the past (and now at 7.7%).

Financial repression (along with cheap land, tax breaks etc) also means that outsized SOEs profits are subsidies from the household to the state. Although household income has increased significantly, consumption as part of GDP has fallen to only 30%+.

If China is to rebalance towards a consumption driven economy, SOEs must take the hit. Rebalancing is essential because the end of the growth model is typically characterized by runaway credit and value destroying investment (think Japan, Brazil). Saying that SOEs should enjoy preferential rates is like saying households should continue subsidize the state sector. A rebalancing will never occur in that case.

Thanks for the link to the article.
The key indicator of a bank's profitability is the cost of capital. As long as the cost of capital remains low, they can always profit from the spread. This was what happened with the US banks, the low cost of capital allowed many to benefit tremendously and recover from the crisis. Although there is now a lot of talk about the rates normalising as China liberalises the banking sector, I think this has been overhyped. It will happen gradually, and it is not in the PBOC interests to create sudden volatility either.
They have just increased the money supply today, and the china 7day repo rate will likely drop as a result. This shows PBOC is still willing to step in to manage in the event of tight liquidity.

<vested>

[specuvestor]

Firstly the SOE may have started the trust loan/ wealth Mgt products trend during 2009 when Chinese govt tried to pump primp the economy with $4tr stimulus. The mistake was that they send a directive to the provinces without helping them to finance it. Hence creative Chinese thought of these products. "Arbitraging the credit of SOE" is just like any fixed income swap deal... with spectacular consequences demonstrated by the GFC if people assume it is a riskless "arbitrage"

Secondly these products by itself it not new. When you buy a CLO fund you are also doing underground financing as these are disintermediation products that are not bearer based. Hence the these products are part and parcel of a developed financial system

The problem is the intrinsic assumed guarantee of the govt and banks even though they are just a middle man. Under Hu and Wen there is a high likelihood that the govt will step in. From the signalling of Xi & Li, I am not sure they will step in immediately. I am pretty sure they will let the RMB3b trust go bust on 31 Jan. Watch that date. Then the market will be more rational about these loans. Question is how to manage the short term market adjustments.

[Wildreamz]

My strategy is to take up small position at current price, accumulate more over the next few months if there are opportunities.

(vested)

Yes, they should/will definitely let the it burst on 31st Jan, send the Chinese investors a wake up call.

Just not sure how the market will react to it.

[GFG]

My strategy is to take up small position at current price, accumulate more over the next few months if there are opportunities.

(vested)

Yes, they should/will definitely let the it burst on 31st Jan, send the Chinese investors a wake up call.

Just not sure how the market will react to it.

That's the reason why ICBC share price has tanked: nobody really knows how the market will react to a default for a WMP. Its the 1st ever. Regardless of that, in the long run, I believe the default wouldnt affect ICBC profitability. As it stands currently, ICBC is already not legally required to compensate.
Although in China, there are many things that you have to do sometimes, even if you are not legally compelled to.