Xi’s Corruption Drive and the Banks

President Xi Jinping in his continuing corruption campaign has turned his sites from the oil sector to the banks. The president of one of China’s larger banks, Minsheng, has resigned, due to a corruption scandal, and a relatively new board member of the Bank of Beijing is under investigation. Is this part of a broader attack on the financial sector? What does it mean for the banks at a time when they are facing the potential for massive write-downs to due to a declining property market and 18 trillion yuan in local debt?

China’s Local Debt Problem

China officially has 17 trillion yuan in local debt. Almost half of the debt has been incurred by off-balance sheet companies, known as Local Government Financing Vehicles (LGFVs). We visited a number of these local projects and collected data on a wider group. The objective was to understand their source of capital – banks, trusts, bonds, and whether this source of debt represents a systemic risk to the Chinese economy. In addition, we also analyzed the structure and history of local government financing, with the aim of predicting how the leadership will handle the debt burden under the circumstances of a slowing economy.

Huatong Bond Default – Who’s Debt is it Anyway?

Summary: The Shanxi Government has rescued 429 million of bonds near default
owned by Huatong Road and Bridge. At first glance, the last minute deal is another example of a government bailout. But the bigger question is who is really involved in these bonds? As defaults occur with more frequency among bonds, trust and wealth management products, assigning responsibility is going to get more difficult and will pose a systemic risk.

China’s “Targeted” Stimulus

China is avoiding a massive liquidity injection in the hope that smaller, target injections will prevent the economy from going into freefall. But there still remains a pitched bureaucratic battle between the PBOC and other arms of government about how deep – and controlled – the stimulus will be.

Failed Land Sales in China

For the past decade, land has functioned as a giant piggy bank for China’s cash starved local governments. Whenever they ran short of funds to pay for anything from retired steelworkers to eye exams there was usually a piece of land ready to put on the market. Unfortunately, the piggy bank is running on empty.

In 100 Chinese cities tracked by the China Real Estate Information, the volume of land sold fell 47 percent for third quarter this year. Revenue dropped a shocking 75 percent, with prices down 52 percent. For the first time in years, when they put up land for auction local governments suddenly found themselves with unsold parcels. In the past six months, almost 20 percent of land for sale failed to find a buyer.

Trust Failures in China – The First Wave

Summary: Chinese Trusts currently have 11.7 trillion yuan ($1.9 trillion) in funds outstanding for investment. These Trust assets make up approximately one-quarter of all Shadow Banking funds in China. As China’s economy slows, there is concern that Trusts – and by extension Shadow Banking in general – will undergo a wave of defaults. Using a list provided by the Central University of Finance and Economics in Beijing, we have analyzed a list of 31 failed Trusts to see what common themes they provide and what they suggest for the future of the industry. The principal conclusion is there is a surprisingly lack of government support for these failed Trust investments. In only four cases did the Trusts, most of which are government owned, provide capital. The majority of the failed trusts were simply liquidated. This suggests the implicit obligation by the Trusts to support their products may not be in force.

The Myth of the “Lehman Moment” in China

One of the theories of China’s slowing economy is that it will run into a “Lehman moment”. This is when a single financial institution collapses, threatening the entire banking system, ultimately creating a financial crisis.
The theory has neat predictive power: find the weak links among Chinese banks, pin down a useful measure of financial liquidity ­ such as the interbank lending rate ­ and you have a nice way of keeping tabs on the strength or weakness of China’s economy. The problem is the theory may be wrong.

China Stimulus? Even the PBOC Can’t Decide

Investors trying to figure out if China plans to restimulate its economy should be aware that a debate is occurring among China’s top economic policy makers. The pro-­‐ and anti-­‐ stimulus camps disagree over fundamental issues of taxation, capital allocation, and whether there is a property bubble. This disagreement came to light in a series of articles published recently by two officials at the People’s Bank of China (PBOC).