China Banks

[freedom]

I said if it deems fit. if a bank is already bankrupted, there is no point to save the bank. It will be easier to just let the bank bankrupt and the government sets up a new bank or the "good bank" "bad bank" model(save the good bank and let the bad bank bankrupt).

China banks lend RMB and issue RMB deposit. The capital is also in RMB. Why would it need foreign currency for capital or doing business domestically again? Foreign reserve is for a different purpose. If you need import foreign product and the counter party does not like your currency as a payment, you get the currency the counter party asks and buy the product. Or you can find a seller who accepts your currency.

In a confident crisis, the currency is devalued. But why should it not if it has loss all over the place? US dollar depreciated a lot when the financial crisis was developing in 2007 - 2008. What problem are you talking about in Argentina and Russia? Be specific, please. The Russian banks are okay in terms of domestic banking business. They are not okay if they borrow a lot in foreign currency. And they can always declare bankruptcy if they could not repay foreign currency debt.

A huge difference between the coming China financial crisis(if it comes) and Asian Financial crisis is that China banks do not borrow much in foreign currencies and China has a bankruptcy law and is willing to execute it.

[specuvestor]

Your casual tone seems to imply that bank bankruptcy is an isolated incident without 2nd or 3rd degree impact, such that bankruptcy solves all problems. After the GFC and post mortem I guess there are still believers that the banking system should be washed clean with bankruptcy like a phoenix out of ashes and a new order to emerge, like what Great Depression "taught" us.

You can see ICBC interim report June 2014 as a proxy on page 159 on FX risk, and page on 45/46 on their discussion for international assets. They are just 7% of assets but this figure is bound to grow much more strongly with internationalisation of RMB, and bearing in mind the context of RMB1.35tr in capital for RMB20.3tr of assets.

And you should find out more about the dynamics of bank run and capital withdrawal on a confidence crisis. it is not a simple straight line cause and effect, with GFC itself contained many surprises. It is akin to banks pulling their lines from you at the SAME time.

Foreign Reserves is not just for current account payments.

Like I said before, you are unlikley to have personally gone through the AFC to be so adament about your conclusion since you were not observing and learning from it. Now both Argentina and Russia is a slow train wreck that we can observe and learn from. Russia just essentially devalued the Rubles as we speak after spending US$2b on it. And this is an energy exporting country that earns foreign currencies.

The driver for the AFC is actually not the banks but the corporates while the banks were the intermediaries with the fixed exchange rate regimes. I can't recall which Far East country except Taiwan (China is out of scope) didn't have complete bankruptcy law in 1997, but they did not execute the law completely for various good reasons. Greece is a good study on what the reasons can be.

[freedom]

No. I don't think so. Banks such as Wells Fargo, JP Morgan and Goldman Sachs should not bankrupt at all. They are solvent and they have no reason to go through bankruptcy at all. Lehman Brothers, or Bear Stearn, has no reason to survive as every cent of equity has been lost and some more, so either they got bought out(JP Morgan uses its own equity to continue Bear Stearn's business) or they bankrupted(the creditors took loss to cover the short). Citi Group was left with so little equity(solvent, but not able to continue the business) that it required a huge capital injection from the government, but no creditors took loss(exceptional cases aside).

ICBC(the group/holding company) has oversea operations(subsidiaries) which take deposit in foreign currencies and lend in foreign currencies. Additionally, it might issue foreign currency debt for oversea or domestic operations. But whether the ICBC(the China bank subsidiary, not the bank group) guarantees those foreign operations or foreign currencies debt is the question to be asked. When I am talking about the survival of ICBC, I am talking about ICBC the China bank subsidiary, not ICBC, the bank group/holding company.

Maybe you should expand your thesis on confidence crisis and foreign reserve. Broad statement does not make a discussion more meaningful.

The problem in Argentina and Russia has no bearing on China. The economic structure and dynamic is so different. Sorry that you have to expand further on Russia devaluing its currency as I don't see anything related to banks yet. If you are talking about how bad the economy in Argentina and Russia, there are too many causes which does not relate to the banks there.

There are many resources about AFC and I don't have to expand it any further personally. Anyway, we can't relive whatever happened in the past and try different methods. So let's focus more on the present?

When a company bankrupts, it bankrupts. The equity holders take the loss first and then the creditors if not enough. Pretending it not bankrupted does not make it not bankrupted, only transferring the wealth from someone else to another group of people which should take the loss. bankruptcy is not as scary as many people think. The solvent operating companies can continue to produce and serve. The bankrupted holding companies and subsidiaries can sell their assets including the solvent operation companies to repay the debt. The new owners can continue the profitable business and of course, the equity holders and maybe creditors will take a huge loss. Not every part of Lehman Brother bankrupted. Profitable business were sold to Barclays and other financial institutions to repay creditors. Much of Lehman Brothers' investment banking business is still alive in Barclays.

[specuvestor]

The problem in Argentina and Russia has no bearing on China. The economic structure and dynamic is so different. Sorry that you have to expand further on Russia devaluing its currency as I don't see anything related to banks yet. If you are talking about how bad the economy in Argentina and Russia, there are too many causes which does not relate to the banks there.

Your question was: "What reserves has to do with the solvency of the mega banks in China?"

Banks being part of the local financial system and global payment system will be affected when there is a cash crunch. Whenever there is a financial crisis the banks get hit first as their interest rate and asset/liablity gets mismatched by the volatility and the underlying counterparty risk increases, their leverage and dependence of capital markets exacerbates their problem.

As you are probably aware of my consistent posts about China's "crisis", I don't think it is an issue. I'm answering your this particular question but I do think your understanding has to fit the real world from multiple facets and not just singular objective.

Your understanding of bankruptcy is akin to what I heard an analyst ask Yuanta, the largest broker in Taiwan when their PTB was below one: "Why don't you shut down the business and distribute proceeds to shareholders to enhance shareholders' value?"

My jaws dropped. That's the diff between academia and practical real world without considering second or third order reasons or impacts. There is logic behind "too big to fail"... things exist for a reason, if not MULTIPLE reasons... question is whether it makes sense

[freedom]

“ "Why don't you shut down the business and distribute proceeds to shareholders to enhance shareholders' value?“”

No, No, No. This is not bankruptcy at all. That's liquidation. A huge difference. And even in that case, what happens to the business? It continues. What changes is who owns the business. I don't see a problem.

"Banks being part of the local financial system and global payment system will be affected when there is a cash crunch."

Cash? In what currencies? Sorry that USD is not cash in China, neither is Euro. RMB? then not related to foreign reserve. Global payment system? The commercial banks have to clear with PBoC on that. The payment goes through PBoC, not the commercial banks themselves, unless private contracts. When companies can't pay foreign creditors, the banks does not pay on their behalf, neither would PBoC, through foreign reserve.

It hurt greatly during AFC because countries such as Thailand and Indonesia continued to defend their currencies even though there was no way for them to maintain the peg. If and only if both Thailand and Indonesia had allowed their currencies to depreciate to the true market value, the pain could have been much less. Of course, more companies would have bankrupted, but the business would have continued

I am sure the Chinese government and PBoC knows it well.

[specuvestor]

No, No, No. This is not bankruptcy at all. That's liquidation. A huge difference.

We know they are not the same thing... that's not my point... never mind


When companies can't pay foreigners, usually the local banks are involved somewhere in the chain as well, whether LC or credit lines, etc. They are intrinsically intertwined.

Just as you can't say a slowdown in property market just affects banks' mortgage book growth. That's just the first order impact.

[specuvestor]

Sorry for OT but i always enjoy theory in action:

"Companies are scrambling for dollars and euros as they contend with $54.7 billion of debt repayments in the next three months, according to central bank estimates. Lukoil has asked lenders for a pre-export finance facility denominated in dollars, according to three people with knowledge of the matter.

Corporate borrowers will need to find at least $90 billion domestically by the end of 2015 to refinance debt, Economy Minister Alexei Ulyukayev told lawmakers in Moscow today."

http://www.bloomberg.com/news/2014-10-08...treat.html

This is a country with $400b foreign reserve but also $700b external debt.

[freedom]

"This is a country with $400b foreign reserve but also $700b external debt. "

United States has little to none foreign reserve. But companies and banks in US have borrowed a lot in JPY, EUR and other currencies(they lend a lot in USD to foreign companies, too). So will the US enterprises have trouble because US has little reserve? Should we be afraid that the US companies will scramble for foreign currencies?

Without sanction, Lukoil would have no problem in borrowing US dollar. So are Rosneft and other major Russian companies. So is the problem foreign reserve or the sanction?

[freedom]

A lot of investors don't understand banks' position in the economy chain. During distress, banks are the last to take loss and the first to be paid in general. That is, if banks are taking loss, many companies/individuals(suppliers, unsecured creditors, etc) are already taking the loss already and they could not take more loss, so banks have to come in and take the hit. So what can help banks limit their loss? Have a long chain of creditors in front of them so that they can take all loss. That's why shadow banking is booming in China. Probably a lot of investors does not know that total subprime loss was in terms of trillions, but the total loss the banks took was in terms of hundreds of billions only. Why so? The shadow banking system is the answer. The shadow banking system took most of the loss and most of them bankrupted. If not bankrupted, the banks don't have to come in and take any loss. Many small and medium regional banks bankrupted because they were holding the subprime loans on their own balance sheet unlike the majors that securitized the loans and sold to the shadow banking system. The small and medium banks have no one in front of them to take the loss so they have to take the loss. The result is obvious: they took huge loss and some even bankrupted because they lost so much. So the booming shadow banking system will be the loss absorber in the coming crisis in China if it comes.

After the financial crisis, many regulators realize that to make the banking system safer, the banks have to have more equity. Another thing happens in China is that the government is allowing more banks to be set up in China. What do those new banks provide? More equity in the overall banking system. e.g. before the new banks, the total equity in all banks could be just 1 trillion RMB. After that, it would be 1.2 trillion or 1.5 trillion. The BASEL III ration for the overall banking system improves greatly assuming that the total assets of the banking system does not increase. At the same time, those new banks will make new loans which either replace the existing loans from the existing banking system or provide net credit to the banking system. Both will help reduce the pressure of the existing banks.

A few more tools to counter the crisis: a flexible and floating forex system and an orderly bankruptcy law. With more and more domestic companies are borrowing foreign currencies from oversea markets, they pose higher and higher risk to the stability of domestic economy in China. Maybe the Chinese government learn from the AFC, it allows RMB to float recently and with wider bands. If a lot of money are leaving China, you are going to see RMB depreciates greatly to absorb the loss to the economy. Some currency speculators will win some, but most will lose their pants.

An orderly bankruptcy will ensure that business can continue while the companies go through a bankruptcy reorganization process. Loss is loss, there is no point to mask it. Ownership can change, but it does not affect the operation. Isn't it the best way to go forward when there is a crisis?

[specuvestor]

^^^The GFC would have shown you your premise is incorrect. Companies or individuals uses limited liability entities like SPVs to stave off their own risk. US banks were crumbling while US companies, excluding the mortgage related ones and auto and airlines, were doing ok

Shadow banking in China is actually very different from say CDOs. The banks act as agents and not principals, there's a big difference. The problem is one of moral hazard whereby the govt and people are asking the agent to bear the loss of selling them a lemon. It is like you asking your property agent to compensate you now that property prices has gone down. Legally it holds no water but practically and politically we can understand why.

"This is a country with $400b foreign reserve but also $700b external debt. "

United States has little to none foreign reserve. But companies and banks in US have borrowed a lot in JPY, EUR and other currencies(they lend a lot in USD to foreign companies, too). So will the US enterprises have trouble because US has little reserve? Should we be afraid that the US companies will scramble for foreign currencies?

Without sanction, Lukoil would have no problem in borrowing US dollar. So are Rosneft and other major Russian companies. So is the problem foreign reserve or the sanction?

We have discussed about this before. USD is a reserve currency. Rubles is not. US can print USD that the world wants. they are not in the same league "financially" every since petro$ recycling. Recall Russia wants to sell energy in non US$ during 2008 and urge China to sell UST and MBS? There is an underlying political purpose to try cause a run on US$.

Foreign reserve is intrinsically linked to sanctions. If you are unplugged from the global system so is your reserve. Consider self-sufficient China in the 70s or pre-WTO before Zhu

Also remember 1998 Russia default and nationalisations. Russia is a semi-dictatorship. Lenders go in eyes opened with history books opened. And history suggest flexible and floating system is not a cure-all as acadmics and free-market proponents suggest... it depends.

Bankruptcy can lead to liquidation. The operations does not continue. It is evident whenever there is crisis.