Capital grab exposes China’s risk

By Paul Lin 林保華
Wednesday, Jul 14, 2010, Page 8

The Foxconn Technology Group affair shows that China’s economic growth model, which is focused on low wages to promote exports, has reached a turning point. This, however, is not the only worry for China’s economic development. Chinese-investment banks have been actively raising capital in Hong Kong recently, and this shows the hidden risk of the Chinese financial sector.

On April 14, the European edition of the Financial Times ran a report — “Big four China banks in ‘$70bn gap’” — saying Beijing’s method for surviving last year’s financial crisis in fact laid the groundwork for the nation’s next economic bubble.

The conclusion came from a domestic Chinese source: Industrial and Commercial Bank of China (ICBC) president Yang Kaisheng (楊凱生) who published an article in the 21st Century Business Herald in which he expressed his concern for capital shortfalls and bad loans facing the Chinese banking sector in the next five years. According to Yang, as part of a state-led response to last year’s financial crisis, Chinese banks were pressured by the Chinese government to issue NT$3.9 trillion (US$121 billion) worth of essentially bad loans to individuals, businesses and national infrastructure projects. This figure is double the amount of bad loans in 2008.

Following the financial storm that broke in the fall of 2008, China spent 4 trillion yuan (about NT$19 trillion) to save the market. Its stock markets took the lead in a rebound, and real estate prices repeatedly set new highs. China acted like the savior of the global economy, behaving like the nouveau-riche wanting to buy the whole world.

Suddenly, however, its financial situation took a turn for the worse. Originally, Chinese Premier Wen Jiabao (溫家寶) said the money aimed at saving the market would be used mostly for infrastructure projects, while in fact most of the money went into the central government’s state-owned enterprises or local governments’ financing platforms and was used to shore up the stock and real estate markets. The Chinese State Council’s control measures were not effective until it issued its 10-point statement in mid-April.

The central government and its government owned enterprises are still wrestling with local governments. Real estate dealers warn that if housing prices drop by more than 30 percent, it is very possible that many people will default on their housing mortgages and that would hurt the banking sector. In response to this situation, the four biggest state-owned Chinese banks, ICBC, Bank of China (BOC), China Construction Bank (CCB) and Agricultural Bank of China (AgBank), all decided that they would be raising capital by issuing A shares on the Shanghai stock exchange and H shares on the Hong Kong stock exchange. In late March, the State Council approved the fundraising project, requiring that most of the capital be raised through H shares.

The part of the fundraising that has caught the most attention is the initial public offering (IPO) of AgBank, which is scheduled for the middle of this month in Shanghai and Hong Kong. At about NT$880 billion, it is the world’s largest IPO.

The reason AgBank has not been listed on the stock exchange yet is that it is the worst of China’s four big banks and has the most bad loans. Maybe its listing will be “the last tango.”

The other banks will also raise capital, by selling shares and bonds. Their A+H fundraising goals are NT$332 billion for ICBC, NT$475 billion for BOC, NT$356 billion for CCB and almost NT$200 billion for the Bank of Communications. It is very unusual for all these big banks to raise capital at the same time.

In order to raise capital, the stock price must be stimulated to attract investors, but the Chinese stock market is performing poorly and the government has lost control, and this is affecting Hong Kong too. Although patriotic businessmen, such as tycoon Li Ka-shing (李嘉誠), showed their support by becoming shareholders of AgBank, the market has reacted coldly, forcing the bank to repeatedly lower the initial share price. The initial price of the Hong Kong H shares is now even higher than the price of the Shanghai A shares. Some Chinese banks have even rushed to raise capital before AgBank. When ICBC listed its shares in Hong Kong in 2006, its IPO was over-subscribed 76 times, whereas AgBank’s IPO only is over-subscribed 14 times.

China’s state-owned enterprises bought many private companies last year, causing an increase in the number of state-owned enterprises and a drop in the number of private companies. The State Council, however, issued a “new 36-point statement” in mid-May to encourage private investment in certain industries. This to a certain extent reflects the government’s capital shortfall.

Facing the possibility of another global financial crisis, both Chinese President Hu Jintao (胡錦濤) and Wen have stopped bragging about themselves while asking foreign governments not to withdraw from the market because this would affect China’s foreign trade. We should also pay attention to changes in the Chinese economy after this year’s World Expo in Shanghai ends on Oct. 31. The Ma administration must not let the Economic Cooperation Framework Agreement (ECFA) with China obscure its view of these issues.

Paul Lin is a political commentator based in Taipei.


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