{"id":1230,"date":"2019-09-19T14:53:48","date_gmt":"2019-09-19T11:53:48","guid":{"rendered":"http:\/\/www.liberalglobe.com\/?p=1230"},"modified":"2019-11-04T10:11:12","modified_gmt":"2019-11-04T08:11:12","slug":"the-strategies-for-solving-the-problems-of-chinas-banking-sector","status":"publish","type":"post","link":"https:\/\/www.liberalglobe.com\/?p=1230","title":{"rendered":"The Strategies for solving the problems of China’s Banking sector"},"content":{"rendered":"\n

As the signs of the coming global recession are becoming increasingly\nvisible due to the intensity of the trade and monetary wars prevailing on the\nplanet and also from geopolitical events such as the Brexit, the concern of\ninvestors is increasingly turning to China and more specifically to the banking\nsector which is a lever for the development of each economy.<\/p>\n\n\n\n

Since last May and by the end of summer it took part a series of rescues of\nsmall banks in China, small but strong enough in size to cause a financial\ncrisis, starting with Baoshang Bank-a small bank in the Inner Mongolia in\nChina-and with the last (third bank in line) Hengfeng Bank Co., Ltd which\neventually in order to be rescued like the previous banks indirectly\nnationalized when the Chinese sovereign wealth fund buy the company Xiao\nJianhua which was a subsidiary of the Hengfeng Bank Co., Ltd. <\/p>\n\n\n\n

It is prohibited by intellectual property law or in any way illegal use of this article, with heavy civil and criminal penalties for the offender.<\/em><\/p>\n\n\n\n

\"\"
A maglev train is coming out of the Pudong International Airport (Shanghai)<\/strong>
Photo by Author: Alex Needham, Source: Originally from Wikipedia,
licensed Public Domain, https:\/\/en.wikipedia.org\/wiki\/Public_domain<\/figcaption><\/figure><\/div>\n\n\n\n

The <\/strong>signs that create concern<\/strong><\/strong><\/p>\n\n\n\n

The problem was initiated by the interbank market where when things get out\nof control the regulators can hardly gather them. The positive side to these\nevents was the swift response of the Chinese government to the immediate\nresolution of the problems. But this does not ensure that things go well in\nChina’s banking sector.<\/p>\n\n\n\n

The growth of credit in China has skyrocketed since the Chinese government\nbegan stabilising the economy from 2017 and until today without these efforts\nto yield the expected fruits.<\/p>\n\n\n\n

Checking the credit ratio to deposits = 384\/22 = 17,45 (2017) per 1000\nadult residents (Source: World Bank, https:\/\/wdi.worldbank.org<\/a> ), we find that\nChina’s credit expansion has exceeded the upper ceilings and is entering in\nuncharted waters with regard to the risks to its financial system.<\/p>\n\n\n\n

The structure elements that advocate the problems facing China’s economy\ncan be summarized in that the actual credit expansion levels in its economy are\nlikely to be larger than the official figures show. Just the thought that this\nelement is likely to be true causes terror among investors.<\/p>\n\n\n\n

On the other hand, China’s housing market shows signs of overheating and is\nconstantly being fed with funds that are directed as investments in the housing\nmarket. These funds and possibly due to lack of investment opportunities are\nbeing redirected from the Stock market to the housing market where the yields may\nbe higher and given the low risk that has the investment in property.<\/p>\n\n\n\n

In recent years the efforts of the Chinese government have focused on\nartificially supporting the demand of the domestic market by increasing credit\nto consumers and businesses.<\/p>\n\n\n\n

We must not miss the fact that it is common for small and medium-sized banks, such as Baoshang Bank, to be inclined to have small and small-business enterprises respectively, as customers in their credit portfolios. <\/p>\n\n\n\n

This fact allows them to spread\/diversify away the non-systemic risk which is always included to their investments\/credits which are given in the form of a small amount of credit capital to their clients. <\/p>\n\n\n\n

The constantly decreasing domestic demand due to trade wars will cause a\nbig first wave of bankruptcies in China’s small and medium-sized enterprises,\nwhich are overborrowed due to their continued expansion in previous years.<\/p>\n\n\n\n

At the same time, it is not only small and medium size businesses that\noperate with overborrowing in order to acquire more and more assets, but so do\nsmall banks (aggressive expansion) with aim to increase the number of their\nassets (i.e. their comparative advantage) in relation to their competitors.<\/p>\n\n\n\n

To achieve this aggressive expansion, small banks are increasingly relying\non interbank borrowing. But since the economy is shrinking (reducing GDP) small\nbanks are increasingly exposed to high default risks because they borrow funds\nin the interbank market with a higher interest rate in relation to the\nequivalent borrowed by the major state banks. <\/p>\n\n\n\n

If we add to this situation the bankruptcy of small and medium-sized overborrowed enterprises that have in their client portfolios these small banks it could be created a financial crisis that can evolve into catastrophic tsunami for the Chinese banking sector. <\/p>\n\n\n\n

The fact that three small banks that would necessarily save nationalized should be an enough evidence to ring alarm for the Chinese Government.<\/p>\n\n\n\n

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China CITIC Bank in Hangzhou<\/strong>
Photo by Author: Raysonho @ Open Grid Scheduler \/Grid Engine, Source: Own work
licensed Public Domain, https:\/\/creativecommons.org\/publicdomain\/zero\/1.0\/deed.en<\/figcaption><\/figure><\/div>\n\n\n\n

The wrong way to solve the problem<\/strong><\/strong><\/p>\n\n\n\n

Nationalization of problematic banks is the wrong strategy because the\ndamage caused to banks’ balance sheets should be eliminated:<\/p>\n\n\n\n

\u03b1<\/strong>)<\/strong> either by\n“mowing” elements in the liabilities side of banks.<\/p>\n\n\n\n

\u03b2)<\/strong> or by state re-capitalization. The accumulated state re-capitalization (due to many banks who are in a state of high default risk-bankruptcy) would cause an increase not only of the public debt but of the widening of the fiscal deficit in the annual budget of the federal government of China. <\/p>\n\n\n\n

The fact that China has a huge reserve in foreign exchange reserves with continuous state re-capitalizations of problematic banks will cause instability in its foreign exchange reserves.<\/p>\n\n\n\n

The final costs incurred with any application of the\nfirst two options-strategies (a) and (b) will further burden the public debt\nand the annual budget deficit of the China\u2019s federal government. It will\nsubstantially burden the Chinese taxpayer (it is unacceptable). <\/p>\n\n\n\n

The correct resolution of the problem<\/strong><\/strong><\/p>\n\n\n\n

Firstly, a thorough check should be made on the balance sheets of all banks and any other lending schemes operating in the territory of China. The problematic banks that will emerge from this audit should proceed to their re-capitalization in which will participate their shareholders. If the principal shareholder in them is the Chinese government, the funds will come from it and analogously with its shareholding percentage.<\/p>\n\n\n\n

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China’s construction Bank in Hangzhou<\/strong>
Photo by Author: Raysonho @ Open Grid Scheduler \/Grid Engine, Source: Own work
licensed Public Domain, https:\/\/creativecommons.org\/publicdomain\/zero\/1.0\/deed.en<\/figcaption><\/figure><\/div>\n\n\n\n

Next, one of the failing banks should then be used as a vehicle to buy\nit from all the other problematic banks which will have first\nre-capitalized.  <\/p>\n\n\n\n

Subsequently, the other re-capitalized (and\nproblematic by the audit) banks will be transferred to this bank, which is\nselected for redemption, all the damages that they present to their balance\nsheets including all the past due loans to individuals and businesses which hold in their credit\nportfolios.<\/p>\n\n\n\n

Then there should take place a conversion-separation\nof this selected bank into a \u201cgood bank\u201d and a \u201cbad bank\u201d. The good assets and\nliabilities of this \u201cgood bank\u201d that will emerge will be shared among the\nother, re-capitalized first, problematic banks. On the other hand, all the\ndamages and all the past due loans of the problematic banks will be transferred\nto this \u201cbad bank\u201d.  <\/p>\n\n\n\n

Subsequently, the “bad bank\u201d will have to\nrestructure and re-evaluate in current values all the losses and overdue loans\nthat it will now have in its portfolio (all losses and overdue loans of problematic\nChinese banks transferred to it) so where there are overdue loans to be securitized in order to make them more appealing to the interested prospective\ninvestors-funds.<\/p>\n\n\n\n

With this gigantic securitization of problematic-past\ndue loans, these loans will be changed hands and redeemed by investors at low\nprices that will allow them to delete a large part of overdue and problematic\nloans with a profit and discharging the debtor company with full immunity from\ndebts.<\/p>\n\n\n\n

This type of flexibility is not available to banks\nthat have granted any problematic (overdue) business loans because they cannot\nwaive the collateral accompanying a loan, e.g. personal guarantees of\nbusinessman, not to accept loan deletions without the commitment of other assets\nof the debtor.<\/p>\n\n\n\n

The proceeds resulting from the sale of these overdue loans and losses of the “bad bank” will be fully redirected in full to the shareholders of the re-capitalized banks and of course to the Chinese state (according to the total shareholding percentage in these banks) if it participated with its funds in the re-capitalization process of the problematic banks, so that these revenues mitigate the cost of burdening it from the re-capitalizations.<\/p>\n\n\n\n

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Hong Kong: View of Central and Victoria Harbor from Victoria Park<\/strong>
Photo Author: Samtri on fr.Wikipedia, Source: originally from fr.Wikipedia & janvier 2006
licensed Public Domain, https:\/\/en.wikipedia.org\/wiki\/Public_domain<\/figcaption><\/figure><\/div>\n\n\n\n

Thereafter and within a period of six years from the\nexpiry date of the re-capitalization of the particular problematic banks, the\nChinese state should proceed to sale of these re-capitalized and now\nestablished banks at much better prices in order for the shareholders and the\nChinese state (as a shareholder) to be able to collect a large part of all its\nfunds that it used for the re-capitalizations the borne by it.<\/p>\n\n\n\n

In this way, the problematic part of Chinese banking\nsystem will transfer the burdens of the past and sanitized, proceeding to\n“cannibalism” essentially of one of the problematic banks with aim to\nsurvive the other problematic banks and to fully sanitized their existence. <\/p>\n\n\n\n

By implementing this strategy does not mean that new overdue\nloans will not be created to these systemic or non-systemic banks from current\nbank loans, if the recession or sluggish growth continues in Chinese economy\ndue to trade wars etc.<\/p>\n\n\n\n

The disadvantage with this strategy is that social\nunrest can be created because with the securitization and sale of losses and overdue\nloans of the “bad bank\u201d  will start\nlarge numbers of auctions and property foreclosures so that investors-funds can\nget their money back, by taking out from their loan\ncollaterals tens of thousands of overdue\nborrowers\/entrepreneurs.<\/p>\n\n\n\n

In this case, the social protection net of the Chinese\nstate should operate in not leaving any entrepreneur or individual without\ndecent shelter and food while giving the opportunity to its citizen to start\nhis life again from the beginning.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

As the signs of the coming global recession are becoming increasingly visible due to the intensity of the trade and monetary wars prevailing on…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[821,390],"tags":[1070,875,161,1071,1072,1073,246,1074],"class_list":["post-1230","post","type-post","status-publish","format-standard","hentry","category-asia","category-politics","tag-banking-sector","tag-banks","tag-china","tag-credit","tag-credit-ratio-to-deposits","tag-financial-system","tag-foreign-exchange-reserves","tag-re-capitalization"],"_links":{"self":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/1230","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1230"}],"version-history":[{"count":2,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/1230\/revisions"}],"predecessor-version":[{"id":1235,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/1230\/revisions\/1235"}],"wp:attachment":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1230"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1230"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1230"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}