In my opinion, the move by Citic is a reaction to what that company worries is the beginning of a wave of defaults that could overwhelm the trust (and security company) sector's ability to make good investor losses out of the pockets of trust companies.
This will open up a legal can of worms that China's courts and financial regulators are unprepared to deal with. The courts will have to decide if trusts were sold with any implicit guarantee. And whether trust companies can be sued in the event of a default by a borrower. And how much legal responsibility flows back to the bank through affiliated trust companies and through investments that the bank sold to the trust company. (Complicating all this will be the clout of the politically connected wealthy who have bought wealth-management products.)
The big question is what regulators will do with all these off-balance-sheet assets. If banks were required to put them back on consolidated balance sheets, a rise in defaults could damage bank capital ratios just when China's banks are trying to meet new international capital requirements and to make further inroads into global financial markets. Anything that required Chinese banks to buttress their capital requirements would reduce the money supply just when China was trying to increase the money supply to stimulate the economy.
The potential cost
On the precedent of past financial crises, and especially the Asian currency crisis of 1997, I think the odds are very low that Beijing will do anything that raises the bad-loan ratio at China's banks or that might force them to raise significant capital at this point in China's economic recovery. In the aftermath of the Asian currency crisis, Beijing's financial regulators buried massive bad loans by creating new financial companies that bought the bad debt of China's banks and took it off the banks' balance sheets. Then, through complex transactions, these new financial entities buried that bad debt.
That effort wasn't cost-free. China's growth rate for gross domestic product dropped from 9.3% in 1997, before the crisis hit the country's financial system, to 7.8% in 1998 to 7.6% in 1999 before rebounding to 8.4% in 2000.
This time, China is starting from a weaker economic position -- China's growth rate bottomed at an annual 7.4% rate in the third quarter of 2012 -- in a world where developed economies are still digging out from a severe financial crisis and the subsequent Great Recession. And currently, China has much bigger ambitions for its banks on the global financial stage and for the global role of its currency. Those ambitions would be damaged by an Asian currency style crisis -- and fix.
I don't see a Chinese banking crisis crashing China's economy in 2013 any more than it did in 1997. But it certainly wouldn't be good for the share price of China's bank stocks or for the important real estate and financial sectors in China's stock markets. And even if it knocked a percentage point or two off China's economic growth, that's growth that the global economy sorely needs.
I'd watch carefully to see how China's banking crisis develops and how serious it might become.
In doing that observing, I'd pay attention to bad-loan ratios at China's banks -- the official reported rate of 2% or less is clearly understated, so I'd pay more attention to whether it starts to rise than to its absolute number. I'd pay even more attention to companies in China's non-bank financial sector such as Citic Securities and Haitong Securities -- and their related trust companies -- to see how much of the problem they recognize and how they cope with it.
And finally I'd look at moves by the People's Bank to see if China's central bank is getting nervous about bank reserve requirements. If the People's Bank should start to raise reserve requirements even while China's efforts to increase economic growth are unfurling, then I think we've got signs that the banking crisis is bad enough to worry Beijing.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Time to sell Nestlé after stock's big gain
- Why Toyota is a smart yen play
- Yum is still stalled in China
- Why Qualcomm is headed up
- Apple is still a growth stock
- McDonald's can't match year-ago growth
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund(JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this column. The fund did not own shares of any company mentioned in this column as of the end of September. Find a full list of the stocks in the fund as of the end of September on the Jubak Global Equity Fund website.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
More from MoneyShow.com:
VIDEO ON MSN MONEY
"To see the crisis, you have to look past the official balance sheets of China's banks to the gray areas of China's financial industry,..."
Don't we have exactly the same problem in the U.S. shadow banking system? (aka off-the-books derivatives and swaps). The only difference is the size of ours isat least 100 times bigger.
The biggest issue is that the numbers provided have been produced and approved by the PRC as they see fit. They own the banks and the investment firms (owned/managed by Party members families), can manipulate anything including the published GDP or inflation/unemployment rates.
Speaking from experience, there is no real transparency or accountability in China, so take the values given with a grain of salt (or make up your own number like they do).
Until the banking regulators can suspend the offshore banking practices in Cayman Islands,Channel Islands,Cyprus,Dubai,Bermuda and
Cuba,it will be impossible to either regulate or control any lending practices.
Insurance companies,shipping companies,multinational corporations,and individuals can maintain the illusion of solvency because their records are invisible,and unattainable under present accounting principles.
First,the Chinese government is trying to stem the flow of cash and assets into Macau,a fruitless task since few if any Chinese leaders will admit there nation has an enormous criminal society.
Secondly,Chinese and many Italians,Spaniards,Portuguese,Indians,Middle Easterners,Africans,and South Americans do not believe in a well-regulated and honest tax system.They believe their money is controlled by their extended family leadership,and should not be open to the inquisitive eyes of revenue agents.
Lastly, the assets held by various offshore banks are the source of problems for almost every divorce attorney in the world.If you examine the statistics around the globe you can see a correlation between divorce settlements,child support,and violence.Individuals think their children can be kidnapped,and definitely believe their assets can be stolen by unworthy spoutse.
By all their actions it is apparent that the federal reserve believes that keeping prices high and rising will increase demand for products and turn around this economy; but the economic law of supply and demand states that lower prices will increase demand.
Maybe the USA can Bail them out and then forgive their debt!
On the backs of the US citizen
They made bad loans to the U.S. Good luck collecting that one.
"Beijing's financial regulators buried massive bad loans by creating new financial companies that bought the bad debt of China's banks and took it off the banks' balance sheets. Then, through complex transactions, these new financial entities buried that bad debt."
Brilliant! What we need to do is borrow $20T more, create a new country "Defaultstan", pass it our national debt, and then declare them responsible. Problem solved
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'