Sunday, January 18, 2009

My new blog at RGE:

Without even a nice note to public share holders, Chinese banks are in the process of reversing years of progress and is reverting back to state banks in a planned economy. Granted, socialism is the economic system of our time. However, unlike elsewhere, the Chinese government, which is the majority shareholder of most of China's banks, is directly ordering banks to finance a large part of the economic stimulus. The interest of minority shareholders, who care about profit, is increasingly taking a backseat. Shareholders at the very least deserve some clarification on how the promises from a few years ago that Chinese banks will commercialize are being systematically undermined. A note should look something like this...

Dear Chinese Banks Shareholders,

We wish you a prosperous new year of the ox! First of all, thank you for having so much confidence in our ability to transform ourselves into commercial entities. We really worked hard at it! The multiple bailouts we received from our majority shareholder, the Chinese government, helped a lot, but we have also restructured credit approval process and trained our managers in risk management in the past decade. Non-performing loan ratio fell to a historical low of less than 3% at the end of December last year. We wish we could say that we are continuing down this path, but we have some bad news.

As you know, the world economy and China are facing hard time. Export from China dropped for two months in a row, and our majority shareholder, the Chinese government, is worried about unemployment and social instability. So, they told us to forget about risk and profit and to focus on pumping money into the economy. Even our really tough regulator, the CBRC, has hold us to not worry so much about non-performing loans and profit. Well, they are the bosses, so we really don't have any choice but to follow their directions. We hope you understand our predicament.

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. Well, 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.

Then, a couple of weeks ago, we got a strange order from our regulator the CBRC. Before, they were very tough on us and were constantly telling us to be very careful about risky borrowers. However, it seems they changed their minds completely. In the decree, they told us to lend to firms which are in financial trouble due to the global recession. We couldn't quite believe what we were reading, but our regulator is now telling us to find firms in trouble and give them loans. We got a bit confused because we had been told to only lend to healthy firms with good balance sheets and cash flow. Things must be really changing.

The property sector is also not doing very well. Because we got a bit greedy in 2007 and gave real estate developers and speculators willing to pay higher interests many loans, we are a bit worried that they will stop paying us back. In fact, many of them have done so already, and many of us have had to increase provisioning to deal with rising defaults. Sorry, this means less profit into the forseeable future. Relatedly, the central government has urged us to automatically refinance all of our mortgage assets at 30% lower interest rates. Of course, they want to boost consumption and possibly decrease delinquencies. But you see, this will mean less profit for us and for you, we are sorry to report.

If you haven't sold our shares yet, you are probably thinking about it. We don't blame you because we have really taken some large steps backward. Here is maybe some good news. Our majority shareholder, the central government, does not want to see our share prices go into a free fall. So, they are using their giant foreign exchange reserve to buy up bank shares to support their prices, albeit at a pretty low level. Share prices may be maintained, but we foresee declining profit and possibly significant losses for some of us in the medium future. Our majority shareholder will just buy up more and more public shares, we suppose. Pretty soon, maybe we won't need to write this note to our public shareholders any more.


Listed Chinese Banks


You forgot the PS.

P.S.: If you don't like what we are doing then you can kindly buy shares of a Western bank, who are in worse shape than we are, and are going to be forced over the next few months by their governments to be doing exactly what we are being forced to do right now.

We know that we have had our difficulties in the past, but your experience as a minority shareholder in a state-run nationalized bank will no doubt come in handy when Western governments start nationalizing their banks and turning them into state-run entities.

That is of course assuming that there is any shareholder equity left in any of their banks once all of the losses come out, or that when Western government nationalize their banks, they don't end up massively diluting if not totally eliminating the value of the shares you bought before the nationalization.
Good one Victor! This letter should be read by all the shareholders.

To be fair, anyone who bought shares of these banks should have knowm that this could happen. I don't know what exactly they tell them in the small print of the contracts, but it was obvious that these banks (like most of the large Chinese companies) wil do exactly what the government tells them to do.
By encouraging/ordering their banks to make bad loans in order to boost consumption, isn't the Chinese government simply repeating the mistakes of the US?

I'm confused as to why the CCP thinks this strategy will work for them when it didn't work for the US.
When it comes to the urgent political tasks from the big boss, who would care about the interests of minority shareholders and depositors? Do you mean that is the real reason for foreign investors selling their holding in china's banks? I didn't think the foreign insititutions cared about the so-called "strategic" cooperation as much as their Chinese partners did at the very beginning of investment. right?
All good comments. Well, at least in the US, we have yet ordered banks to lend to specific projects. I am sure it will come to that soon though.
To be fair, bank shareholders have made a ton of money over the last few years because the government set the lending interest rate at far higher than the borrowing interest rates.

What happens next depends on the specific projects that the new credit is directed to. If people just build luxury condos and infrastructure, this is bad. However, if the credit is directed at small and medium enterprises and ruraldevelopment, this may be a good thing, even if it increases the NPL rate, provided that there are enough reserves and government guarantees to absorb the NPL's.

A lot depends on what one thinks the US did wrong. Personally, I think that the US was correct in 2001-2002 in expanding the economy, but the mistake was a) a hands off policy that caused credit to be directed at mortgage construction and b) not having sufficient reserves to absorb the NPL's.

At this point in the game, there is going to be an increase in NPL's unless someone comes up with some other idea to provide stimulus and avoid unemployment. "Let the workers riot" is not a politically acceptable option. So if there is going to be an increase in NPL's, we just need to bite the bullet and try to manage that increase, and mitigate the consequences of NPL's.

The other thing is that we really are in the wilderness. Up until mid-2008, "do what the US is doing" was an option, but it isn't now since the US has exactly the same dilemma. If the banks don't loan, then the economy will contract. If the banks do loan, then they will end up with non-performing loans that will kill already weak balance sheets.

My prediction is that the US will find itself in a few months forced to do what China is doing now, but I'd be interested if it tries something different.

The one good thing about Chinese banks is that there has been so much progress at dealing with the NPL issue, that they have some room to maneuver.
Hello Mr. Shih, I want to know if you have Chinese version for this letter, I think more people (of course esp Chinese) should get informed on this issue. Thanks.
The NBC pundits are dead wrong again. This is not the bottom of the recession. Its not the beginning of a true recovery. Its only a brief period of optimism or the beginning of that short and shallow revival. There will be some positive signs over the next year or so amoung the negative. But they will not lead to a true recovery. Our leaders may claim to end the recession in 2010. If that claim is made, it will be based only on that short and shallow (printed) revival. It absolutely will not last. I stand by my predictions made earlier this year. Obama's efforts are revolutionary but they are too little too late. He will have no choice but to acknowledge a severe US depression by the end of his first term or shortly thereafter. Every major economy in the world will be in depression by 2015.

The NBC pundits (Chatzky and Wong) are bound and determined (paid) to plug their coorporate sponsors and perpetuate the 'multiple credit card' lifestyle. Their claim is that you need more than one to build reasonable credit, finance a home, and be relatively secure financially. THAT IS ANOTHER FLAT-OUT LIE. The industry is simply too corrupt and predatory to deal with. It has been for at least 20 years. The use of 'multiple credit cards' is simply too risky, addictive, complicated (check that fine print), and ultimately expensive. In the vast, overwhelming majority of cases, the 'multiple credit card' user has ended up further in debt year after year after year. Their credit was built to some extent on a temporary basis and their ability to repay loans was diminished gradually right along with their bottom line. They ended up paying as much or more in finance charges as they did on principal. That is OBSCENE. Now, their net worth is way down. Their ability to get out of debt f#$&@#. That 'credit' didn't get them anything but F#$#@#. Still, those NBC pundits (liars) have the nerve to perpetuate that 'multiple credit card' lifestyle as if it were ever legit or necessary to begin with. It wasn't. Until two years ago, one could have built reasonable credit with a stable income, a checking account, a savings account, one secured credit card, one loan for a used car, one loan for a new car, and a reasonable downpayment. Until recently, that was enough credit to get a first home loan. Now, the economic boom is OVER. The majority are F#$&@#. Its only going to get worse. A LOT WORSE. The window for ordinary (decent) people to stake their rightful claim is closing fast. They better get out of debt soon and well prepared for the comming US/global depression. It will be catastrophic. Under these circumstances, it is downright reckless and irresponsible to promote more use of credit cards. Only a calculated PIG with an ulterior motive would have the nerve. The 'multiple credit card' lifestyle wasn't the only cause of this economic crisis but it was a contributing factor. Another vehicle amoung many to transfer wealth from poor to rich. Which again, is the single greatest underlying cause. IT WILL BE OUR DOWNFALL.
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