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China: What banks are revealing (II)

Tuesday, 13 Jan 2009

Summary

A few days ago we issued a piece asking just why some foreigners  are unloading their stakes in mainland banks. This is part of our broader view of how stock markets interact with the lending cycle. Today we drill deeper, and give you one money-saving idea- and one money-making idea that is up by 16% since we recommended it early December .

Topics Covered

  1. Beijing and banks
  2. How to save money off this idea
  3. How to make money off this idea

Background

1. Beijing and banks

For many moons we have warned of China's Diktatkapitalismus, whereby particularly that "free wheeling" stock market is less free than most think.  Don't get us wrong: not that guidance from Beijing in itself is anything "bad". But we just think that markets can be smart only if they are regulated properly....

And in our last piece on Chinese banks, we did suggest that the government plays no small role in guiding bank lending - via price and volume. We glean further revelations about this from the Business section of today's South China Morning Post ( have italicized the key bits):

  • The Chairman of the China Banking Regulatory Commission, Liu Mingang, told Bloomberg that "...'the downside to the Chinese economy is even worse than anticipated.' ";
  • Prices in the  property market will decline by 10% - 30% this year. So what? Well, property lending accounts for about 17% of all loans issued by mainland banks - and "the number rises to 65% if loans using property as collateral are included, according to the banking regulator."; 
  • "One source close to the Central Bank said (that) the People's Bank of China actually had no say in  the monetary policy, with Premier Wen Jiabao and other top officials with the State Council  having decision-making controls.";
  • According to an article on page B10 of today's Post, lending rates (i.e. "price") are "...ministered by the government, instead of determined by the market.";
  • Yesterday, Shenzhen Development Bank (stock code 000001:CH) reported a 77%  profit plunge for last year - "...becoming the first mainland lender to warn that huge loan losses had crippled earnings.";
  • This "...could signal deteriorating loan quality at other mainland banks, a worrying development since Beijing wants banks to increase their lending (i.e. "volume") to help stimulate the economy.", and
  • Concern that Beijing may allow the Royal Bank of Scotland to sell its stake in the Bank of China (601988:CH) within the next two to three weeks has triggered concerns that foreign stakeholders in other Chinese banks may talk along similar lines with the capitol's regulators in the near future.

2. How to Save Money Off This Idea

  1. Always consult your financial adviser first.
  2. Do NOT buy Chinese banks or bonds issued by them!

3. How to Make Money Off This Idea

  1. Always consult your financial adviser first.
  2. On 8th December 2008 we recommended buying an ETF that shorts the China stock market, FXP:US.  Since said day, this instrument has risen by 16.2%

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