Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Thursday, March 27, 2014
Tense times with China's banks , shadow banking and harmful rumors March 27 , 2014 -- The Anatomy Of Panic: How A Rumor Mutated Into A Three-Day Chinese Bank Run ....... Arrest over Chinese bank run Authorities accuse man accused of spreading rumour that led to flurry of withdrawals from two banks in Jiangsu province .... China's Credit Pipeline Slams Shut: Companies Scramble For The Last Drops Of Liquidity
Cash stacked up at Jiangsu Sheyang Rural Commercial Bank in Yancheng, Jiangsu province, to show it has not run out of money. Photograph: Carlos Barria/Reuters
Police in the rural Chinese city of Yancheng have detained a person suspected of spreading rumours that sparked a three-day bank run, security officials said on the city police force's official microblog on Thursday.
Government, bank officials and residents all referred to a rumour that a local bank branch had turned down a client's request to withdraw 200,000 yuan (£19,000/US$32,200), which sparked speculation the bank was insolvent. This prompted a rush among depositors to withdraw cash.
"After a police investigation a person surnamed Cai who spread the rumours has been tracked down, and during the night on 26 March was detained by authorities. The police are now investigating the matter further," Yancheng police said in a statement posted on China's Twitter-like Sina Weibo.
Though the bank incident is isolated and is not expected to impact the economy, authorities have been trying to crack down on the spreading of rumours, which are seen as a potential threat to stability.
The panic that hit the corner of eastern Jiangsu province near Shanghai struck a raw nerve and won national airplay, a possible reflection of public anxiety in China over the financial system after the country's first domestic bond default this month shattered assumptions the government would always step in to prevent institutions from collapsing.
The police statement urged people not to start or spread rumours and said those who did would be pursued under the law by authorities.
Jiangsu Sheyang Rural Commercial Bank and the Rural Commercial Bank of Huanghai – the two small lenders affected by the bank rush – declined to comment and Reuters was unable to verify the rumour.
Local police would not comment further on the case to Reuters.
Yesterday we showed the end result of what happens in a China, in which bankruptcy and default are suddenly all too real outcomes for the country's hundreds of millions of depositors, when the risk of losing all of one's money held in an insolvent bank becomes a tangible possibility in "What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors." Today, we look in detail at all the discrete elements that culminated with hundreds of Chinese residents lining up in front of a bank in Yancheng and rushing to withdraw their money only to find their money not available (at least until the regional government was forced to step in with a bail out to avoid an even greater panic).Why is this a useful exercise? Because since we will certainly see many more example of it in the near future, it pays to be prepared. Or least it certainly prevents one from losing all of their money...
This is what happened, and when it happened, it happened quick. From Reuters:
The rumour spread quickly. A small rural lender in eastern China had turned down a customer's request to withdraw 200,000 yuan ($32,200). Bankers and local officials say it never happened, but true or not the rumour was all it took to spark a run on a bank as the story passed quickly from person to person, among depositors, bystanders and even bank employees.
Savers feared the bank in Yancheng, a city in Sheyang county, had run out of money and soon hundreds of customers had rushed to its doors demanding the withdrawal of their money despite assurances from regulators and the central bank that their money was safe.
The panic in a corner of the coastal Jiangsu province north of Shanghai, while isolated, struck a raw nerve and won national airplay, possibly reflecting public anxiety over China's financial system after the country's first domestic bond default this month shattered assumptions the government would always step in to prevent institutions from collapsing.
Rumours also find especially fertile ground here after the failure last January of some less-regulated rural credit co-operatives.
And since nothing beats a first person account here is just that, courtesy of Jin Wenjun who saw the drama unfold.
He started to notice more people than usual arriving at the Jiangsu Sheyang Rural Commercial Bank next door to his liquor store on Monday afternoon. By evening there were hundreds spilling out into the courtyard in front of the bank in this rural town near a high-tech park surrounded by rice and rape fields.
Bank officials tried to assure the depositors that there was enough money to go around, but the crowd kept growing.
In response, local officials and bank managers kept branches open 24 hours a day and trucked in cash by armoured vehicle to satisfy hundreds of customers, some of whom brought large baskets to carry their cash out of the bank.
Jin found himself at the bank branch just after midnight to withdraw 95,000 yuan for his friend from a village 20 kms (12 miles) away.
"He was uncomfortable. It was late and he couldn't wait, so he left me his ID card to withdraw his cash," Jin said.
By Tuesday, the crisis of confidence had engulfed another bank, the nearby Rural Commercial Bank of Huanghai.
"One person passed on the news to 10 people, 10 people passed it to 100, and that turned into something pretty terrifying," said Miao Dongmei, a customer of the Sheyang bank who owns an infant supply store across the street from the first branch to be hit by the run.
Claiming to be a Yancheng resident, one user of Sina Weibo's Twitter-like service repeated the story on Monday about the failed 200,000 yuan withdrawal, adding that "rumours are the bank is going bankrupt."
When later contacted by Reuters online, he said he had heard the rumour from his mother when she came back from town. Huanghai and Jiangsu Sheyang banks declined to comment.
China's banks are tightly controlled by the state and bank bankruptcies are virtually unheard of, so the crisis has baffled many outsiders.
Yet in Sheyang, fears of a bank collapse resonate.
In recent years, this corner of hard-strapped Jiangsu province has experienced a boom in the number of loan guarantee, or 'danbao', companies and rural capital co-operatives.
These often shadowy private financial institutions promised higher returns on deposits than banks, but many have since failed.
Qu Guohua, a spiky haired former migrant worker in his 50s, nearly lost 30,000 yuan in a credit guarantee scheme that went up in flames.
What saved him one day in January 2013 was a tip-off from a friend at a rural co-operative just down the street from the loan guarantee company where he had his money.
"He told me the other one was going to go out of business and I better go get my money quick," he said.
Qu managed to get his cash, but others behind him in line were not so lucky, he said.
That helps explain why lines formed so quickly once the rumours started circulating this week. Luck has it, he deposited the cash in a bank next door: Sheyang Rural Commercial Bank.
Banks are different than credit co-operatives and guarantee companies in that they are regulated by China's banking watchdog and subject to strict capital requirements.
On Wednesday, officials' painstaking efforts to drive that message home were in full swing.
Bank managers stacked piles of yuan behind teller windows in full sight of customers to try to reassure them that they had plenty of cash on hand. Local officials used leaflets, radio and television to try to calm nerves.
Near one of the troubled banks, a branch of the China Commercial Bank - one of China's 'Big Four' state-owned banks - was running a ticker message on an electronic board over the entrance stating: "Sheyang Rural Commercial Bank is a legal financial organisation approved by the state, just like us".
While small groups of depositors still gathered at several bank branches in and around this part of Yancheng, some arriving by motorbike, others by three-wheeled motor vehicles common in the Chinese countryside, there were signs that the banks' efforts were bearing fruit.
Jin said he did not panic when the rumours were spreading and on Wednesday, like many others, he made a deposit.
Others, like Qu, are holding their nerve. On a visit to see his hospitalised daughter, he decided to nip into a local bank where he still has about 10,000 yuan - just for a look.
"I'm not nervous about my money in the bank. It's protected by national law.
* * *
The same international law that "protected" the Cyprus banking system?
In the meantime, perhaps one should ask: why is it that people everywhere around the globe are so jittery, be it Chinese bank depositors, or E*trade baby high frequency "investors" in US stocks? Is it because everyone sense that fundamentally the system is more broke and insolvent than ever?
* * *
In short, the US has a stock market, which everyone knows is fake and manipulated, but as long as it keeps going higher, it is "safe" to put even more cash into epically overvalued equities. And since everyone is confident they can pull their money before everyone else does, the downswings are sharp and violent (and usually require the Plunge Protection Team to get involved and halt them), and in many ways a complete one-sided panic.
Just like in China. Only in China, instead of being stuck behind their computers, people actually have to go out on the street and withdraw their physical cash before everyone else does.
The problem, of course, is that once the lies and the illusions end, and they will, there will not be enough physical claims to satisfy everyone, be it due to a deposit or equity flight. Because in a fractional reserve system already stretched to the max and leveraged to record levels, one thing is certain: once the upward momentum dies, only devastation and guaranteed 90%+ losses for most, await.
It goes without saying that while the blue line has troubles of its own (namely finding the proper rate of liquidity lubrication to keep over $600 trillion in derivatives from collapsing into an epicgross=net garbage heap), it is the red one, that of China, where $1 trillion in credit was created in the fourth quarter alone, that is clearly unsustainable for the simple reasons that i) China will quickly run out of encumbrable assets and ii) the bad, non-performing loan accumulation has hit an exponential phase, which incidentally is why Beijing is scrambling to slow down the "flow" from the current unprecedented pace of $3.5 trillion per year.
It is also because of this wanton and mindblowing capital misallocation (thede novo created debt goes not into profitable, cash flow generating ventures, but into fixed asset investments which create zero and potentially negative cash flow, due to China's already epic overinvestment resulting in ghost cities, and building that fall down weeks after their erection) that China has finally decided to provide lenders with the other much needed component of the return equation: risk. This, in the form of debt defaults, something unheard of in China for two decades.
Which brings us to today, when we find that China's credit formation, until now proceeding at a breakneck speed, has suddenly ground to a halt. Reuters explains:
Some of China's struggling firms are finally getting the reception that regulators have been hoping for - a cold shoulder from banks in the form of smaller and costlier loans.
Reuters has contacted over 80 companies with elevated debt ratios or problems with overcapacity. Interviews with 15 that agreed to discuss their funding showed that more discriminate lending, long a missing ingredient of China's economic transformation, has become a reality.
Up against a cooling Chinese economy and signs that authorities will not step in every time a loan goes bad, banks are becoming more hard-nosed and selective about whom they lend to.
...
For household goods maker Elec-Tech International Co Ltd (002005.SZ), less credit is the new reality. Its bank cut its borrowing limit by 500 million yuan ($80.79 million) to no more than 2.5 billion yuan this year, said Zhang, an official at Elec-Tech's securities department.
"Last year, the bank gave us a discount on our interest rates. This year, we probably won't get any discount," Zhang who declined to give his full name said. "It feels like banks are not lending and their checks are becoming more rigorous."
...
There are signs that even state-owned firms, in the past fawned over by lenders for their government connections, have to contend with higher rates, lower lending limits and more onerous checks by banks.
"Interest rates are going up 10 percent for the entire industry," said Wang Lei, a finance department manager at PKU HealthCare Corp. "Obtaining loans is getting difficult and expensive."
Here's why PKU Healthcare will likely be among the first to experience what happens when the liquidity runs out:
PKU HealthCare, which is controlled by Peking University and makes bulk pharmaceuticals, has struggled to remain profitable. Its debt-to-EBITDA (earnings before interest, tax, depreciation and amortization) ratio exceeded 60 at the end of September, four times the average for listed Chinese companies from the sector.
That's the kind of leverage that not even Jefferies would sign a "highly confident letter" it can raise a B2/B- debt deal at 10% or less. It is also a huge problem for Chinese corporates which suddenly realize they have just a tad too much debt on their books.
Some gauges of China's corporate debt are already flashing red. Non-financial firms' debt jumped to 134 percent of China's GDP in 2012 from 103 percent in 2007, according to Standard & Poor's.
It predicted China's corporate debt will reach "stratospheric levels" and become the world's largest, overtaking the United States this year or next.
Fearing a wave of defaults as China's economy cools after decades of rapid growth, regulators in the past two years told banks to cut off financing to sectors plagued by excess capacity such as steel and cement.
Experts say banks were at first slow to respond, but in the past few months, banks have started turning down credit taps.
"We have become more prudent in issuing loans," said a spokesman for Bank of Ningbo. He added that the bank has intensified communication with companies in troubled sectors or borrowers deep in debt.
"Under normal circumstances, we would review company loans every quarter or every six months, but for the sensitive cases, we will step up channel checks and work closely with the companies."
Another manager at a regional Chinese bank said it was overhauling its lending in cities identified as high-risk, such as Urdos and Wenzhou. Located in Inner Mongolia, Urdos is infamous for its clusters of empty apartment blocks that pessimists say is an emblem of China's housing bubble. Wenzhou, is China's entrepreneurial hotbed that recently lost its shine after local property boom went bust.
So with increasingly more uber-levered companies suddenly blacklisted by the banks, what do they do? Why go to the shadow banking system for last ditch liquidity of course, where it will cost them orders of magnitude more to stay viable for a few more weeks or months.
Ss companies bend the rules, risks shift outside the banking system into the universe of networks of seemingly unrelated firms connected by murky financial deals. For example, trade loans subsidized by the government to help selected sectors are quietly re-directed by companies to other unrelated businesses, firms say. New financing methods also emerge as easy credit dries up.
The latest plan hatched by a cash-strapped aluminum end-user involves having banks buy the metal and re-selling it to firms who pay out monthly loan plus interest.
How do you spell re-re-rehypothecation again... while selling the collateral.... again? Remember this: it really does explain all one needs to know about China.
"The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer."
Anyway, continuing:
Others such as Xiamen C&D Inc, an import and export firm, are directly cashing in on firms' thirst for funds. Xiamen C&D, which borrows at less than 6 percent per year is offering loans of several hundred thousand yuan to smaller firms at 7-8 percent, said Lin Mao, the secretary of Xiamen's board of directors.
For larger companies, typical loans amount to 20-30 million yuan, and are 90 percent insured by Chinese insurers, he said.
Banks grow more aware of the risks. But rather than pull the plug on teetering firms, some bankers say they prefer a slow exit to keep them afloat for as long as possible to claw back their loans.
Unfortunately, for most the can kicking is now over. Which brings us to the second part of this story - China's housing bubble, and specifically how its foundations - China's own property developer firms - just imploded as a result of all the above. Also from Reuters:
China's property developers are turning to commercial mortgage-backed securities and looking at other alternative financing as creditors grow more discriminating in the face of rising concerns about the country's real estate and debt markets.
Bond buyers are shying away from second-tier developers because property sales have cooled as the economy slows. The expected bankruptcy of a local developer and the country's first domestic bond default this month have heightened scrutiny of borrowers.
The property companies have a renewed sense of urgency to raise capital after U.S. Federal Reserve Chairman Janet Yellen indicated the central bank, which sets the tone globally for borrowing costs, may raise interest rates as early as the spring of 2015, sooner than many investors had anticipated. Higher rates mean higher borrowing costs, both for the companies and for their home-buying customers.
Highlighting the search for alternative funding avenues, property fund MWREF Ltd earlier this month issued the first cross-border offering of commercial mortgage-backed securities (CMBS) since 2006. The offer was priced at a yield lower than two dollar bonds issued last week, IFR, a Thomson Reuters publication, said.
"The market will see more of these products," said Kim Eng Securities analyst Philip Tse in Hong Kong. "It's getting harder to borrow with liquidity so tight in the bond market. It's getting harder for smaller companies to issue high-yield bonds."
The notes, issued through a MWREF subsidiary, Dynasty Property Investment, were ultimately backed by rental income from nine MWREF shopping malls in China and were structured to give offshore investors higher creditor status than is normally the case with foreign investors. MWREF is managed by Australian investment bank Macquarie Group Ltd, which declined to comment.
Beijing Capital was the first Hong Kong-listed developer to issue dollar senior perpetual capital securities last year, an equity-like security that does not dilute existing shareholders.
"As market liquidity is changing constantly, we have to keep adapting and exploring different funding channels," said Bryan Feng, the head of investor relations.
Chinese regulators last week allowed developers Tianjin Tianbao Infrastructure Co. and Join.In Holding Co. to offer a private placement of shares, opening up a fund raising avenue that had been closed for nearly four years.
New rules were also unveiled last week allowing certain companies to issue preferred shares, including companies that use proceeds to acquire rivals.
"As liquidity tightens and developers see more pressure...they may consider M&A via preferred shares," said Macquarie analyst David Ng.
CMBS, senior perpetuals, preferreds: what is the common theme? This is last ditch capital, far more dilutive of equity, and one which always appears just before the final can kick. As such, it means that the credit game in China is over. And now the only question is how long before the market realizes the jig is up.
Some already have. As we reported last week, "Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong, and some are knocking up to a fifth off the price for a quick sale, as a liquidity crunch looms on the mainland."
In other words, those who sense which way the wind is blowing have already entered liquidation mode. Because theyknow that those who sell first, sell best. Soon everyone else will follow in their shoes, unfortunately they will be selling into a bidless market.
Until then, we will greatly enjoy asfinally, after many years of delays, the dominoes start falling.
As of March 15, Chinese developers had issued 15 U.S. dollar bonds raising $7.1 billion so far this year, compared with 23 issues that raised $8.1 billion in the year-earlier period. "That said, quite a number of developers have demonstrated the ability to access alternative markets, such as the offshore syndicated loan markets as another means of raising capital," said Swee Ching Lim, Singapore-based credit analyst with Western Asset Management.
Offshore syndicated loans for Chinese developers have reached $1.17 billion so far in 2014, compared with $9.8 billion for all of last year, Thomson Reuters LPC data shows. Demonstrating the change in investor sentiment, bonds issued by Kaisa Group in January with a yield of 8.58 percent are now yielding 9.5 percent. The company did not immediately respond to a request for comment.
Times Property issued a 5-year bond this month, not callable for 3 years, to yield 12.825 percent. A similar instrument from China Aoyuan Property in January was priced at 11.45 percent. Both Kaisa and Times are in the B-rating "junk" category, which is four notches above a default rating.
Property prices on the whole are still rising, but there are signs of stress in second and third tier cities. Early indications of property sales in March, traditionally a high season, were not promising, although final figures for the month would not be available until April, said Agnes Wong, property analyst with Nomura in Hong Kong. That may mean developers have to cut prices and investor sentiment may worsen.
"This is hurting the cash flows of the smaller players," she said.
The market stresses ultimately could lead to the reshaping of the property development sector, said Kenneth Hoi, chief executive of Powerlong Real Estate Holdings Ltd (1238.HK), a mid-sized commercial developer.
"In the future, only the top 50 will be able to survive," he said during a briefing on the company's earnings on March 13. "Many small ones will exit from the market."
Submitted by Tyler Durden on 03/26/2014 11:57 -0400
Email
No comments:
Post a Comment