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

JACK MA: How he controls ALIBABA through a series of Voting Rights.

 Jack Ma is the founder of Alibaba (USD 681 Billion listed in NYSE). Jack MA effectively holds only a 4.8 % stake in Alibaba as of 25 July 2020 and is worth USD 48.8 Billion as per current rates. He controls the entire Alibaba Holdings Group and Ant Financial (now renamed as Ant) and will eventually control both these entities till the date he decides to retire his personal control over these huge companies. 

Let’s see a few companies where Jack Ma has a direct and/or indirect stake. 

  • Alibaba 

  • Ant Financial 

  • Taobao Marketplace 

  • Tmall 


  • AliExpress 

  • Cainiao Network 


  • Koubei 

  • Alipay 

  • Amap 

  • Lyft Inc 

  • Youku Tudou Inc.,(equivalent to YouTube) 

  • Alibaba Pictures Group 

  • South China Morning Post (SCMP) 

  • Lazada Group 

  • Intime Department Store 

  • Paytm 

  • Snapdeal 

  • Paytm Mall 

  • Zomato 

  • BigBasket 

  • Xpressbees 

  • ( equivalent to Groupon) 

  • Alibaba Cloud Computing 

  • Aliwangwang ( instant message service) 

  • Laiwang ( messaging application) 

  • Sina Weibo ( Equivalent to Twitter) 

  • Asiaray Media Group Singapore 

  • Wavemoney Myanmar 

    Jack Ma virtually controls the promoters , Shareholders to hold majority voting rights in some of these companies. 

    How does Jack Ma control all his companies with such low shareholding?

    1. Alibaba Holdings Group ( AHG) is registered in the Cayman Islands and through a series of contracts owns the Alibaba partnership in China.

    2. Alibaba is a Variable Interest Entity ( VIE) , which means it’s registered in the Cayman Islands and makes 90 % revenue in mainland China.

    3. VIE structure relies on a network of fundamental contracts to function. The first set of contracts involves financing. The offshore-listed company, through a loan agreement provides capital to the Chinese Op. Co. by way of the WFOE ( wholly foreign owned enterprise) 

    The Chinese owners also execute an “equity pledge agreement,” which guarantees equity to the WFOE. The WFOE also typically has an “options agreement” with the Chinese owners to purchase equity in the Chinese Op. Co. at the lowest permissible price under the PRC law. Finally, a “consulting or technical service agreement” allocates the operating company’s profits to the WFOE.

    The second set of contracts regulates shareholders’ rights through a proxy agreement. The WFOE obtains the shareholder rights of the Chinese Op. Co. Some VIE-structured companies may use a “preferential stock structure,” which deprives shareholders of traditional voting rights.

    4. Alibaba is an offshore company listed in NYSE and has a series of contracts with its onshore operating company in mainland China. These Shareholders only own a stake in an offshore company and not directly in the operating company. Lack of direct controlling financial interests in VIE companies denies traditional voting rights. 

    5. Alibaba’s board is controlled by a combination of its top managers and partners, even though Japan’s SoftBank Group Corp. and Altaba Inc. formerly known as Yahoo Inc. holds 28.8% and 14.8%, respectively, according to an Alibaba stock exchange filing. Altaba (formerly Yahoo inc) agreed to vote its shares in favor of the election of all of the Alibaba Partnership’s  director nominees and the SoftBank director nominee. 

    6. A separate entity, known as Alibaba Partnership and headed by Alibaba founder Jack Ma, has the right to nominate the majority of the company’s board of directors despite the fact that the partners would maintain a minority stake in Alibaba Holdings Group (AHG). 

    7. With Alibaba, because the partners are entitled to decisions regarding assets reallocation and cash flow attribution, so they effectively receive a larger share of the company’s income. The board is also free to make deals that benefit the partnership at the expense of Alibaba Group’s outside investors.

    8. China does not allow foreign ownership in certain protected industries such as Internet, Finance and Telecommunications. Hence VIEs are created to raise funds outside China. 

    9.Alibaba Partnership operates in China and owns essential key technology and business licenses on behalf of Alibaba Holdings Group (AHG). 

    10. Alibaba Partnership and other shareholders own AHG. 

    11. Jack Ma and Joe Tsai are designated as continuity partners, who may remain partners until they reach the age of seventy (and this age limit may be extended by a majority vote of all partners). 

    12.  All partners except continuity partners are required to retire upon reaching the age of sixty or upon termination of their qualifying employment.

    13. Though Jack Ma stepped down as chairman, Ma will continue to remain a lifetime partner of Alibaba Partnership, a group comprising of 36 members who have the right to nominate a majority of the company's board of directors

    14. Partnership is registered in Cayman Islands as an exempted limited partnership consisting of 36 members, out of which 5 prominent members dictate both the Nomination of partners and Partnership Committee members. 

    15. Morgan Stanley Capital International (MSCI) has listed AHG as the worst corporate governance entity four times.

    16.  USTR (Office of United States Trade Representative) identifies Taobao Marketplace (subsidiary) as a Notorious Market 

    17. Alibaba Partnership pays royalties to AHG and funnels off capital from China. The Alibaba partners transfer all profits from Chinese Op. Co. to WFOE, and eventually to an offshore listing company, serving as the crucial moving part to the VIE machine. The “Exclusive Technical Services Agreement” requires the operating company to pay the WFOE nearly all of its “pre-tax profits” but disguises this payment as a “service fee” to the WFOE. The services provided by a WFOE in the e-commerce industry typically include “website maintenance, programming, sales support, fulfillment services, curriculum development, etc.” In some cases, the WFOE may also receive a royalty for licensing key intellectual property (IP) assets to the operating company. In sum, a Chinese Op. Co. can legally funnel all of its profits through a WFOE to reach the offshore holding company. 

    18.   AHG —the holding company for Alibaba listed on the New York Stock Exchange (NYSE)—claims that it is not subject to tax in China

    19.  Furthermore, the Cayman Islands are not members to any double tax treaties, which makes it more difficult to obtain information and ensure transparency. The Cayman Islands operate as a “secrecy jurisdiction” for corporations and their subsidiaries to hide from taxes and regulation

    20. Alibaba has USD 15.45 Billion outstanding loans in the form of unsecured senior notes and term loans as on 31 March 2020. 

    21. Jack Ma, Joe Tsai (the executive vice chairman) and J. Michael Evans, the president and director, have purchased their own aircraft for both business and personal use. The use of the above-mentioned directors’ and executive officers’ own aircrafts in connection with the performance of their duties is free of charge to AHG, and AHG has agreed to assume the cost of maintenance, crew and operation of the aircraft where the cost is allocated for business purposes.

    22.  In 2011 Jack Ma transferred ownership of Alipay, the payments arm that has since been renamed Ant Financial, out of Alibaba and into a company that he controlled personally. 

    23.   Alibaba owns 33 % of Alipay , but Jack Ma effectively controls about 50 per cent of the voting interest in Ant Group and also Alipay processes 100 % of Alibaba payments. 

    24.  As of March 31, 2020, Hangzhou’s Junhan Equity partnership and Hangzhou Junao Equity partnership held approximately 50% of Ant Group’s equity interest, AHG held 33% and other shareholders held the remaining equity interest.

    25.  Economic interests of Ant Group through Hangzhou Junhan Equity partnership are owned by Jack Ma, Simon Xie and other employees of AHG, Ant Group and its affiliates and investee companies.

    26.  Jack Ma is able to exercise the voting power of Junao Equity partnership  and Junhan Equity partnership, two of the major shareholders of Ant Group, because he owns 100% of the general partner of both Junao and Junhan Equity Partners 

    27.   The Alipay commercial agreement has an initial term of 50 years and is automatically renewable for further periods of 50 years and is subject to AHGs right to terminate at any time upon one year’s prior written notice. If the Alipay commercial agreement is required by applicable regulatory authorities including under stock exchange listing rules, to be modified in certain circumstances, a one-time payment may be payable to AHG by Ant Group to compensate for the impact of the adjustment.

    28. The data sharing agreement initially between Alibaba and Alipay had a minimum term of ten years. In May 2015, AHG board approved the extension of the term of the agreement to a total of 50 years.

    29. Zomato - Alipay holds an edge in voting rights. For instance, it can vote on all matters submitted for the consideration of the company’s shareholders, including those who hold ordinary equity shares. Moreover, if any laws don’t permit Alipay to exercise its voting rights, then Zomato founder Deepinder Goyal shall vote as per its instructions. Also Alipay has secured the right to become the largest shareholder in Zomato as well and that Alibaba can also subscribe to the food delivery company’s shares. Besides, Alipay will have a say on any strategic agreements by Zomato in payments, online-to-offline services and e-commerce segments. 

    In effect Alibaba China business is owned and controlled by Jack Ma and the public outside shareholders own stakes in an offshore entity which receives revenue entirely at the discretion of an Operating Company which is not legally owned by this public listed entity and cannot be owned by any foreign entities as per prevailing PRC laws. 

    Credits : MacKensie Larson and Annual report of Alibaba filed with SEC

CHINA: A True Story and the pending danger

China: A True Story and the pending danger 

Since opening up to foreign trade and investment and implementing free-market reforms in 1979, China has been among the world’s fastest-growing economies, with real annual GDP  growth averaging up to 9.5% through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history”

As China’s economy has matured, its real GDP growth has slowed significantly, from 14.2% in 2007 to 6.6% in 2018, and that growth is projected by the IMF to fall to 5.5% by 2024

Now that much has been written, discussed and read about the flourishing Chinese economy, let’s take a close look at the challenges China has on its hand which are seldom reported by the media. 

Policies that were employed in the past to essentially produce rapid economic growth at any cost were very successful. However, such policies have entailed a number of costs (such as heavy pollution, widening income inequality, overcapacity in many industries, an inefficient financial system, rising corporate debt, and numerous imbalances in the economy) and therefore the old growth model is viewed by many economists as no longer sustainable.   

This appears to indicate that the government accepts and allows the use of free market forces in a number of areas to help grow the economy, but the government still plays a major role in the country’s economic development.

Industrial Policies and State Owned Enterprises (SOE) 

China has become one of the world’s most active users of industrial policies and administrations. China’s State Council has said that they currently continue to dominate a number of sectors (such as petroleum and mining, telecommunications, utilities, transportation, and various industrial sectors); and are shielded from competition;  and are the main sectors encouraged to invest overseas and dominate the listings at the Chinese Stock Markets. 

There are more than 150000 State Owned Enterprises (SOE) at the central and local government level employing about 57 Million people. 

China’s SOEs may account for up to 50% of non-agriculture GDP.

One study found that SOE constitutes 50% of the 500 largest manufacturing companies and 61% of the top 500 service sector enterprises. 

Not only are SOEs the dominant players in China’s economy, many are quite large by global standards.

Fortune’s 2019 list of the world’s 500 largest companies includes 119 Chinese firms (compared to 29 listed firms in 2007). Of the 119 Chinese firms listed, Fortune identified 80 % of these are SOE. Together, these 80% firms in 2019 generated $8.2 trillion in revenues. 

State-Dominated Banking Sector, Excess Credit, and Growing Debt 

China’s banking system is largely dominated by state-owned or state-controlled banks. The managers of China’s state banks are drawn from the ranks of the Chinese Communist Party cadre system, which enables the party and government leaderships to exert influence over bank lending. In 2019, the top five largest banks in China in terms of assets were state-owned entities. banks (including the five large state-owned banks), the three government policy banks, joint-stock commercial banks (where government entities are a major stockholder), together accounted for 68.5% of total bank assets in China. Foreign participation in China’s banking system is relatively small accounting for 1.25 % of the total bank assets.

SOE’s are believed to receive preferential credit treatment by Government banks, or private firms must pay higher interest rates or obtain credit elsewhere. The Chinese banking sector is the largest in the world with a total assets of US40.1 Trillion. SOE’s are having a lion's share of the bank advances. It is often estimated that SOE do not repay their loans, which may have saddled the banks with ever increasing non performing loans. Many analysts contend that one of the biggest weaknesses of the banking system is that it lacks the ability to ration and allocate credit according to market principles, such as risk assessment. 

China Chengxin International Credit Rating reckons the magnitude of hidden local government debt was roughly $6.5 trillion in 2019, up from about $6 trillion in 2018. This year, analysts at Chengxin International figure it could rise toward $7.2 trillion 

The Chinese central government uses the banking system to boost credit in order to help meet its GDP growth objectives. However, China’s debt levels (in both dollars and as a percentage of GDP) have risen sharply within a relatively short time, which some have speculated could spark an economic crisis in China in the future. From 2006 year-end to mid-2016, China’s total non financial sector debt as a percentage of GDP increased from 143% to 254% (up 111 percentage points). In dollars, China’s corporate debt rose from $3 trillion to $17.8 trillion (up $14.8 trillion) and currently greatly exceeds U.S. corporate debt levels. Several observers have warned that China’s credit growth may be too extensive and could undermine future growth by sharply boosting debt levels, causing overcapacity in many industrials (especially extending credit to firms that are unprofitable to keep them operating), contributing to bubbles (such as in real estate), and reducing productivity by providing preferential treatment to SOEs and other government-supported entities.

Local government debt is viewed as a big problem in China, largely because of the potential impact it could have on the Chinese banking system. During the beginning of the global financial slowdown, many Chinese subnational government entities borrowed extensively to help stimulate local economies, especially by supporting infrastructure projects. The Chinese Government has a reported 

debt of $5.48  trillion as of 2020. Efforts have been made over the past few years by the central government to restructure local government debt and restrict local government borrowing, with mixed success, according to some press reports, because of pressures on local Government to maintain rapid economic growth

Many economists blame China’s closed capital account for much of China’s debt problems. The Chinese government has maintained restrictions on capital inflows and outflows for many years, in part to control the exchange of its currency, the renminbi (RMB), against the dollar and other currencies in order to boost exports. Many argue the Chinese government’s restrictions on capital flows have greatly distorted financial markets in China, preventing the most efficient use of capital, such as overinvestment in some sectors (such as real estate) and underinvestment in others ( such as services)

Environmental Challenges

China’s economic growth model has emphasized the growth of heavy industry in China, much of which is energy-intensive and high polluting. The level of pollution in China continues to worsen, posing serious health risks to the population. The Chinese government often disregards its own environmental laws in order to promote rapid economic growth. China’s environmental challenges are illustrated by the following incidents and reports.

2018 report by ExxonMobil estimated that China contributed about 60% of the growth in global CO2 emissions from 2000 to 2016, and that its emissions would surpass the combined CO2 levels of USA and EU by 2025

More than 80% of underground water in China is heavily polluted. According to statistics reported by the Chinese media, more than 80% of the underground water in large river basins of mainland China is unfit for drinking or bathing because of contamination from industry and farming.

Air pollution is estimated to contribute to more than 1 million premature deaths in China each year.

The Chinese government has indicated that it is taking steps to reduce energy consumption, boost enforcement of environmental laws and regulations, reduce coal usage by expanding the use of cleaner fuels (such as natural gas) to general power, and relocate high-polluting factories away from large urban areas, although such efforts have had mixed results on the overall level pollution in China . In addition China has become a major global producer of clean and renewable technology In January 2017, the Chinese government said it would spend $361 Billion in renewable energy power generation by 2020.

Corruption and the Relative Lack of the Rule of Law

The relative lack of the rule of law in China has led to widespread government corruption,

financial speculation, and misallocation of investment funds. In many cases, government

“connections,” not market forces, are the main determinant of successful firms in China. Many

U.S. firms find it difficult to do business in China because rules and regulations are generally not

consistent or transparent, contracts are not easily enforced, and intellectual property rights are not

protected (due to the lack of an independent judicial system). The relative lack of the rule of law and widespread government corruption in China limit competition and undermine the efficient allocation of goods and services in the economy. A New York Times article reported that (former) Chinese Premier Wen Jiabao’s family controlled assets worth at least $2.7 billion. One study estimates that between 2001 and 2010 , China was the world's largest source of illicit capital outflows of USD 3.8 Trillion. A 2012 survey by the Pew Research Centre’s Global Attitudes project reported that  50% of respondents said that corrupt officials are a very big problem ( up from 39% in 2008) 

Chinese officials often identify government corruption as the greatest threat to the Chinese communist party and the state. 

The Chinese government anti corruption watchdog reported that 106,000 officials were found guilty of corruption in 2009. Since assuming office in 2012, Chinese Xi Jinping has carried out an extensive anti corruption drive. China has reportedly sought cooperation with the United States to obtain extradition of 150 alleged corrupt who have fled to the USA. However many analysts contend that the anticorruption campaigns are mainly used to settle political scores with out-of-favor officials. Some analysts contend that President Xi's anti-corruption drive is more about consolidating his own political rather than instituting reforms . 

In addition, there are some indicators that the current anti corruption campaign may be having a negative impact on the Chinese economy, due to hesitancy by some local officials to pursue projects they feel will lead to scrutiny from the central government.

Many observers argue that meaningful progress against government corruption cannot occur without greater government transparency, a system of checks and balances, a free press, Internet freedom, and an independent judiciary. In October 2014, China held its fourth Plenum of the 18th Party Conference. The meeting focused on the need to enhance the rule of law in China, but emphasized the leading role of the Communist Party in the legal system. 

China maintains a weak and relatively decentralized government structure to regulate economic activity in China. Laws and regulations often go unenforced or are ignored by local government officials. As a result, many firms cut corners in order to maximize profits. This has led to a proliferation of unsafe food and consumer products are being sold in China or exported abroad. Transparency International’s Corruption Perception Index for 2019 ranked China 80th out of 176 countries and territories up from 72nd in 2007.

Demographic Challenges

Many economists contend that China’s demographic policies, particularly its one-child policy (first implemented in 1979), are beginning to have a significant impact on the Chinese economy. For example, according to a McKinsey Global Institute study, China’s fertility rate fell from about 5.8 births per woman in 1964 to 1.6 in 2012. This is now affecting the size of the Chinese workforce.

The existence of a large and underemployed labor force was a significant factor in China’s rapid economic growth when economic reforms were first introduced. Such a large labor force meant that firms in China had access to a nearly endless supply of low-cost labor, which helped enable many firms to become more profitable, which in turn led them to boost investment and production. Some economists contend that China is beginning to lose this labor advantage. According to the Chinese government, the size of its working age population (ages 16 to 59) peaked at 925 million in 2011, but then fell for seven consecutive years to 897 million in 2018. The Chinese government projects that its working age population will drop to 830 million by 2030 and to 700 million by 2050. If these projections prove accurate, the Chinese working age population could drop by 225 million individuals (2011-2050).

The one-child policy has also resulted in a rapidly aging society in China. According to the Brookings Institute, China already has 180 million people aged over 60, and this could reach  20 % by 2020 and 27% by 2030. 

With a declining working population and a rising elderly population, the Chinese government will face challenges trying to boost worker productivity (such as enhancing innovation and high-end technology development) and expanding spending on health care and elderly services. 

Credits: Wayne M Morrison, Bank for International Settlement , Economist Intelligence Unit , OECD, China National Statistics office , Bloomberg,