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Chinese bank risk
A story caught my eye in Hong Kong’s English language establishment paper related to Chinese bank risk. Goldman Sachs issued a report on (maybe) five Chinese banks, changing their ratings to neutral and sell. Eastmoney.com is a subsidiary of government newspaper People’s Daily, came out to stoutly defend the banks against concern about Chinese bank risk.
Communist Party mouthpiece takes issue with Goldman Sachs report calling a ‘sell’ on some major Chinese bank stocks | South China Morning Post – I had a look at the article in question. From a Chinese bank risk aspect of things a number of things caught my eye:
- Ping An Bank and China Merchants Bank have the largest exposure to real estate, accounting for 8% and 6% of total assets which the report authors are flagging as a canary in the coal mine for Chinese bank risk
- CMB real estate loans accounted for 5.61% of about of total loans and advances
- Ping An Bank real estate-related business bearing credit risk totalled 322.093 billion yuan, also down from the end of the previous year, and if this is taken as the numerator and divided by its total assets of 5.456 trillion yuan, it yields a share of about 5.9% – interesting choice of wording
- Overall, the non-performing rate of the mainland real estate industry is still in a period of accelerated exposure in 2022, and the overall non-performing rate of listed banks for public real estate continues to rise to over 4.3%
- There was a reference to “Industrial Bank” that has “deteriorating assets and liabilities” – I think that this is Industrial and Commerce Bank of China better known as ICBC. ICBC is recognised as a systemically important bank
Systemically important bank means that Chinese bank risk becomes global economic risk. While it is state-owned (being one four original institutions that spun out of the Bank of China in 1979), it still exposes retail shareholders and bond holders around the world. Word on the grapevine is that a number of Goldman Sachs partners had long term holdings in ICBC for well over a decade, which explains the banks irrational exuberance for China AND means it would have been extremely hard for the analysts to name check ICBC in this kind of report. During the 2006 IPO, Goldman Sachs purchased a 5.75% stake for US$2.6 billion, this apparently was the largest sum Goldman Sachs has ever invested at the time.
Of course issuing this kind of report in China means that they can’t talk about associated Chinese bank risk. For instance:
- Property development company bonds which just a few months ago Goldman Sachs thought would deliver high returns partly down to Chinese government support in the sector.
- Local governments depend on property development for their main source of revenue and have issued a lot of debt which they may now find harder to pay off resulting in further Chinese bank risk. Given that this is more directly linked to government, it may get less scrutiny
- Finally China’s industrial and services economic growth seems to be an issue with youth unemployment running very high at 20%
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