Recently, People’s Bank of China Governor Zhou Xiaochuan said China would liberalize interest rates for consumer deposits within two years, a surprisingly frank timeline on a controversial subject. Liberalized interest rates would cause a chain reaction of problems in the financial system, all because of the government’s decision to keep the value of Renminbi in a tight range.
China’s largest bank, ICBC, formally declared it would not support a 3 billion yuan bankrupt trust investment product the bank sold through its branches. The Wealth Management Product (WMP), called the “Credit Equals Gold No. 1,” raised funds for a coal mine and is due for repayment January 31. The announcement brought a mild panic to China’s financial community and among overseas investors. Whether the Gold Trust defaults or not, here are five reasons why a financial crisis caused by a trust default is unlikely.
Myanmar is facing a stark choice – open the doors to the rule of law or slide into Chinesestyle state capitalism run by the military. So far, it looks like the country could go either way.
Investors have been worrying about the potential collapse of the Trusts in China. They should be paying attention to the bank failures in the rural areas.
Conducting company due diligence in China can be a risky undertaking. Company filings are inadequate, financial statements often cloak the truth, and executives are prone to mislead investors. There are two metrics often overlooked by Western investors that are helpful in judging whether a company is shaky or an outright fraud: Related Party Transactions (RPT) and what I call “State Connections.”
eijing’s desire to pump up the Chinese economy is leading it into dangerous territory.
Although China has piled on debt, the country has been relatively cautious about one of the big areas that led to the U.S. financial crisis: leverage. It was the slicing and dicing of mortgages into digestible bitesized chunks called derivatives that was a key contributor to the U.S. financial meltdown in 2007. Once they unwound, they threatened the banking system itself. Until recently, China has avoided complicated derivatives and other forms of leverage. However, desperate to keep the economy from slumping, the Chinese reluctance to wander down the leverage path seems to have faded.
A decade ago, when China was struggling to clean up its banking system, regulators pulled a rabbit out of a hat. They set up a series of “bad banks” – called Asset Management Companies (AMC) – and took Rmb 1.4tn ($125bn) of debt off the hands of the four State Banks in Beijing. It was a big success, leading to the listing of the “Big Four” banks in Hong Kong and a healthier financial system. Now, they’re trying to pull the same trick again – this time across the country.
Chinese economists are quick to point out that the country has plenty of money to pay off its debts and could easily avert a financial collapse. The government, they say, could function as lender of last resort. How does one confirm whether there are sufficient resources in China to provide adequate capital for a massive collapse in economic activity, including a popping of China’s property bubble?
China’s local debt has reached astronomical levels. Beijing has approved four AMCs to help sell non-performing loans and bad assets. It’s likely that another 30 will be created elsewhere in the country. How much money can they recover from bad debt?
We collected data on 6500 Trust products. The risks are rising in the 12 trillion yuan trust industry, including money flowing to local government investments.