The question is not why the Chinese government took over Baoshang Bank – a small trading bank in Inner Mongolia – but rather why the government told us it took over the bank at all and what the rare description means for China's banking system as a whole.
The takeover of Baoshang is the first government takeover by a Chinese bank since its financial crisis in the late 1990s, but it is certainly not the first acquisition in general. Over the past two decades, the government has many times recapitalized abusive banks or forced them to merge with state banks or other trusted companies. Once that has been done, though, it has made it quiet.
That's what makes this Baoshang situation so strange. The fact that regulators squirt a little fear into the market.
"One of the more unusual aspects of the Baoshang drama is that it has been reported ̵
"This is peculiar to an economy that claims to grow to 6.5%, has average NPLs below 1.5%, and it has strong buildings and real estate markets."
What a nonsense
Like J Notes, if you buy the statistics – China's financial system shouldn't have a problem.
Maybe in the same way, if you look at Baoshang's last issue, it should also have no problem. The bank has not published an annual report since 2016, but then it showed a lending rate (NPL) of 1.68%, according to the investment bank Nomura. It's up from 1.41% the year before – not terribly on paper, especially with $ 60.8 billion in assets and $ 27 billion in deposits.
This certainly does not seem to be a bank that constitutes "credit risk" as the Chinese government cited in the takeover decision.
But there are other strange, and perhaps equally important, things to note about Baoshang too.
- It was part of a massive conglomerate called the Tomorrow Group, run by a fund manager, called Xiao Jianhua.
- In 2017, Xiao, who used to run money for China's elite, was arrested for fraud and in vain in Hong Kong. Soon after, Baoshang's credit rating was downgraded.
- China has cracked down on similar large economic conglomerates (like Anbang Insurance) in recent years. These are so-called "gray rhinos" that the government thinks are so large and opaque that they can hide problems.
- A source told Chinese business publication Caixin that Baoshang acted as a "cash machine" for Tomorrow Holdings, and another said it had helped Tomorrow put together at least $ 21.7 billion in funding through shady practices.
So is this the takeover of Baoshang's parent company? Or Baoshang's balance? Or is it about sending messages to China's financial sector that moral hazard is introduced?
What about a little of all three?
A certain man has the power to clear away
If the Baoshang takeover is about the parent company, consider this as a continuation of the shelling of opaque "gray rhino" conglomerate assets that the government has had for a while. It's not a kind of warning about any potential catastrophic economic events.
If it is about Baoshang's balance, then consider another example of the most dangerous tension in China's debt-spun financial system. To make the system grow, banks must continue to expand more and more credit, but not all of that credit is going to be good. As J Capital noted, Baoshang is involved in literally thousands of lawsuits seeking repayment of infringing loans, with interest rates up to 18%, or 24% with penalties, generally secured in side contracts. "
This tells us that the balance of Chinese banks is not trusted. On paper (at least the latest available to the public / media to see) is Baoshang healthy. The government recognizes that the papers are – a dangerous concept to introduce into a country there economists already have questions about basic gross domestic product data.
Finally, if this is about moral hazard, then perhaps regulators tell the market to prepare for any losses. As Nomura pointed out, "regulators did not state that they would guarantee everyone Obligations Baoshang Bank, "adds that depositors and creditors with over 50 million Chinese yuan of bank assets" must negotiate with the take-over task force for repayment. "
Before shocking it to China's trade war with the United States, keep in mind that the Chinese economy has slowed down for some time. By the end of last year and into the beginning of the year, policemen were legitimately concerned, and Xi Jinping has for several months is warned that things would be more difficult financially. Commercial war or not, deleting the financial system should be painful for China.
So maybe policemen tell the market that there are too many balls in the air now, and some of them are going to hit the ground. The point is, at least they let us know.