A Letter of Apology to Shareholders of Chinese Banks.

Sunday, January 18, 2009 9:58
Posted in category The Big Picture

A few weeks back, Victor Shih wrote a post for RGE monitor where he explored the fact that after 5 years of Chinese banks cleaning up their NPL ratios, the new stimulus package could potentially unwind that progress.

It was an opinion that others disagreed with, but Victor stood by his thoughts and has written a fantastic follow up post Dear Chinese Banks Shareholders….

Acting on behalf of a banking executive, victor’s letter to Chinese shareholders reflects not only his fears that banks will be forced to abandon risk assessment, and aversion, but that because of this it is very possible that the banks will see large amounts of non-performing loans (NPLs) back on the balance sheet.

You have probably heard of the 4 trillion RMB stimulus package launched by the central government.  We are going to finance about half of it.  By the way, the central government has ordered us to provide 1 trillion RMB of it before the end of February because they want the money out there as soon as possible.  As you can understand, even if we don’t sleep for the next two months, we won’t have time to conduct careful risk evaluation on these projects in such a short time!  Well, we don’t have to look too carefully since these projects will be guaranteed by the central government.  We will place these projects on a “green passage” for quick approvals and just cross our fingers and hope that these loans will not default.

That’s not all though.  Local governments all over China are clamoring for loans from our branches.  They want us to help them finance over 20 trillion RMB worth of local projects.  Yes, we know that most local governments run annual deficits and would have a hard time paying back loans.  We are trying very hard to say no to them.  But you know, our majority shareholder, the central government, has told us not to say no all the time because it would be selfish to do so.  We will say yes to most of the requests from provincial and major municipal governments.  Even if we have doubts about their proposed projects, we are pretty sure that the central government will bail out provinces if they run into major financial trouble–we are hoping at least.  We know this is not what you want to hear, but again, we have little choice in the matter.

It is a fantastic article one, and based on analysis that I believe to be true as well.  I myself am worried that these banks, like American banks, will end up with large amounts of non-performing debt, and what that will mean for the system.

Sure, the state has 2 trillion in reserves on the books, but with as many ways as everyone is earmarking those funds, it is clear little of those reserves will remain when they are most needed.

.. and that is the real risk.

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One Response to “A Letter of Apology to Shareholders of Chinese Banks.”

  1. Paul Denlinger says:

    January 21st, 2009 at 1:42 am

    I believe that Victor’s POV and opinion is completely valid. All of China’s banks are instruments of government policy, and right now, policy is to keep society stable by keeping unemployment low _at all costs_. This means inflation, maybe even uncontrollable inflation, in the near future, but the center figures that this is a bridge it will cross when it gets to it.