China’s Superpower Banks are Out of Dollars


China and it’s banking system is the largest in the world in terms of assets. The total assets of the Chinese banking system were 285 trillion yuan, or $40.6 trillion, in 2019. 

The main regulatory body that oversees the Chinese banking system is the China Banking Insurance Regulatory Commission (CBIRC).

There are  five specialised banks namely The Industrial and Commercial Bank of China (ICBC), The China Construction Bank (CCB), The Bank of China (BoC), The Bank of Communications (BoCom) and The Agricultural Bank of China (ABC). All these banks are public listed and majority owned by the Chinese Government.  China has also allowed a dozen joint-stock commercial banking institutions and more than a hundred city commercial banks to operate in the country. Additionally, there are banks in China dedicated to rural areas of the country.
How does the majority of five specialised bank operate across the world  
One-fifth (19) of the top 100 banks of the world  are headquartered in China and collectively reported US$25.8 trillion in assets.

China's "Big Four" — Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. — remained the four largest banks in this year's ranking with combined assets of US$14.82 trillion

Chinese banks have been shielded and instructed by their government for years. Chinese banks do not have enough capital flowing through their systems to cover the risks on their balance sheet. This comes through their outstanding return on equity ratios. 

Chinese commercial banks held a total of RMB2.37 trillion ( USD 334 Billion) of NPLs by September 2019, according to the China Banking and Insurance Regulatory Commission (CBIRC), up from RMB2.0 trillion ( USD 282 Billion) as of the end of 2018; special-mention loans totalled RMB3.8 trillion (USD 536 Billion) by September 2019 up from RMB3.4 trillion ( USD 480 Billion ) as of the end of 2018. NPL ratios for commercial banks ranged between 0.83% (foreign banks) to 4.00% (rural banks). According to China’s National Audit Office (NAO), NPL ratios exceeded 20% in 12 commercial banks by year end 2018 , while some had ratios higher than 40%.

China has central governed Asset Management Companies (AMC) better known as “Bad Debt Managers”. The sole purpose of these companies is to buy bad debt from the banks. 

The names of the four major AMC are Huarong , China Orient , China Great Wall and Cinda. 

Between 1999-2019 , China is home to USD 1.5 Trillion of NPLs and the Big 4 AMCs (Huarong, Cinda, China Orient and Great Wall) remain the largest NPL buyers, investing at a run-rate of around US$ 100 billion per annum. 

Regional AMCs have also Joined the Fray since 2015 and the latest wave of NPLs began in 2015 and saw the growth of regional AMCs. A total of 50-60 regional AMCs were created to support sales and facilitate online auction processes, over- the-counter trades and securitisation of projects. 

Local AMCs are often seen as being more active than national AMCs in acquiring NPLs from local commercial banks as they tend to have stronger connections with the local market.

In June 2017, the State Administration of Foreign Exchange (SAFE) launched a pilot program in Shenzhen for cross-border NPL disposals. The program was extended and enhanced in May 2018, allowing AMCs and commercial banks to sell NPLs to foreign investors via a private sale process, rather than the customary court-administered process (provided that certain criteria were fulfilled). 

The Shenzhen Qianhai Financial Assets Exchange (SQFAE) was also established in Shenzhen to help streamline and accelerate sales processes while reducing transaction costs for international investors. The platform facilitates all aspects of cross-border NPL transactions, including NPL payments, settlement, notarisation and documentation, as well as tax payments.

The move could be a sign of the government being ready to step up efforts to tackle the estimated 5 trillion yuan ($714 billion) pile of nonperforming loans (NPLs) stuck on the balance sheets of the country’s financial institutions.

The four AMCs have extended activities beyond bad debt into banking, insurance and securities, leading to worries about potential risks. This was especially the case after the chairman Lai Xiaomin of Huarong, one of the four AMCs, was charged for taking bribes in 2018 after cash-stuff vaults were reportedly found in his apartment. Lai had allegedly channeled funds from Huarong into privately-owned companies with risky investments.

The recent phase one trade agreement with Washington paves the way for U.S. financial services companies to apply for asset management licenses that put them on par with their Chinese peers when it comes to buying distressed debt.

Foreign players such as Oaktree Capital Management, Lone Star Funds, Goldman Sachs, Bain Capital, PAG and CarVal Investors have already moved into the market, and others such as Nomura Holdings and Deutsche Bank see it as an opportunity.

Savills Research in a note said that purchase of bad-loan portfolios by foreign players nearly tripled in 2018 to 30 billion yuan from the previous year

The local liquidity in China is clearly drying up," said Soo Cheon Lee, SC Lowy's chief investment officer

Banks powered much of the economic expansion over the past few years, and regulators ignored loose lending as banks used the growth in loans to keep headline numbers in line with levels prescribed by regulators. But with a slowdown well underway, the challenges are fanning out.

Chinese financial institutions established over the past 20 years -- primarily with state support to relieve the pressure on banks -- simply do not have the capacity to keep a lid on bad debts.

China, after spending two decades trying to clean up bad debt by itself, is finally in need of foreign capital.

It's just not that the banks are saddled with bad debt -- the distressed debt market by itself is in duress.

Banks offloaded 2 trillion yuan ($286.8 billion) in soured assets in 2019,

So far, foreigners have focused on distressed debt backed by properties, including hotels, warehouses and other commercial or residential buildings. They buy loans at a 30% to 50% discount, with the aim of buying loans at deep discounts to the properties' market value, then making a return of as much as 20% by selling the real estate

The entry of more foreign funds with rich experience should help with the bad debts resolution

There is no global trust in the yuan and the Eurozone is a basket case. So clearly China is losing the Dollar match and needs to shore up its capital soon. 

Credits : Nikkei Asian Review, PWC and S&P Globa

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