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Chinese Banks Push Back On Shadow Banking Regulations – Expose “Catch-22” For Financial System
Chinese Banks Push Back On Shadow Banking Regulations – Expose “Catch-22” For Financial System
In November, we discussed how the post-Party Congress measures to deleverage and crackdown on the worst abuses in China’s credit bubble took an important step forward with the announcement of a new era of regulation for China’s $15 trillion shadow banking and asset management industry. See “A New Era In Chinese Regulation Means Turmoil For $15 Trillion In China’s Shadows”. In particular, the authorities turned their sights on wealth management products (WMPs).
On the way out are “guaranteed returns” and “capital pools” which had turned the $4 trillion sector into a leveraged Ponzi scheme. We joked that in a “radical and shocking” departure from the norm, financial institutions would have to offer yields based on the risk and returns of the underlying assets. Paying out guaranteed returns with new funds from depositors would no longer be allowed.
Commentators at the time described it as “a new era of regulation” which would lead to tighter risk control and slower but higher quality growth in the Chinese economy, blah, blah. However, our interest was piqued by the implementation date for the new rules. This is slated for the end of June 2019, providing Chinese banks and the entire shadow banking system a grade period to get their house in order. As we suggested.
We can only guess the delay reflects the enormity of the problems discovered by China’s regulators when they finally looked under the hood.
We didn’t have to wait long for confirmation that our cynicism was justified. It turns out that there was a “closed-door meeting” last week during which Chinese banks laid out the systemic risk if the regulators pursue their reform plan. According to Reuters.
…click on the above link to read the rest of the article…
China Deleveraging Hits Corporate Bonds As Cascade Effect Begins
China Deleveraging Hits Corporate Bonds As Cascade Effect Begins
Following the market lockdown during October’s Party Congress, many commentators were disturbed by the continued rise in Chinese government bond yields as we returned to “business as usual”, with the 10-year rising to 4%. At the beginning of this month, we discussed the sell-off (see “China: Shadow Bank Inflows Are Critical To Sustain The Ponzi…But They’re Falling”) and noted a useful insight from the Wall Street Journal.
An important anomaly to note about the bond rout: as government bonds sold off, yields on less-liquid, unsecured Chinese corporate bonds barely moved.
That is atypical in an environment of rising rates – usually, bond investors shed their less-liquid holdings and hold on to assets that are more easily tradable, like government debt.
The question was…why had corporate bond yields barely moved? The answer, according to the WSJ, was that China’s deleveraging policy led to redemptions in the shadow banking sector, e.g. in the notorious $4 trillion Wealth Management Products (WMP) sector. Faced with redemptions, shadow banks had to sell something…quickly…and highly liquid government bonds were the “easiest option”. Furthermore…and this is potentially significant…the WSJ noted.
Meanwhile, the nonbanks have held on to their higher-yielding corporate bonds, which at least have the benefit of helping them to maintain high returns.
Not any more (see below).
We agreed with the WSJ’s explanation at the time, but noted that the government bond sell-off was actually a sign of the unravelling of the WMP Ponzi scheme. The Chinese authorities are wise to the Ponzi which is why they announced the overhaul of shadow banking and WMPs last Friday (see “A ‘New Era’ In Chinese Regulation Means Turmoil For $15 Trillion In China’s ‘Shadows”). However, the new regulations don’t kick in until mid-2019, a sign to us that when they looked “under the bonnet”, they didn’t like what they saw.
…click on the above link to read the rest of the article…
Chinese Insurer Warns Of “Mass Defaults, Social Unrest” Due To “Mass Redemption” Run
Chinese Insurer Warns Of “Mass Defaults, Social Unrest” Due To “Mass Redemption” Run
One month ago, China came “this close” to the one event which terrifies Beijing more than anything: a run on China’s shadow banks.
As a quick reminder, 150 customers of China’s Mingsheng Bank, the country’s largest private bank, were furious in mid-April when they learned that some 3 trillion yuan invested in Wealth Management Products, the backbone of China’s shadow banking system, had vaporized after bank employees had engaged in fraud and embezzled the funds without ever investing it (later it emerged that Mingsheng employees had put the money into “cultural relics” and jewelry, for their own use).
And while fraud and embezzlement are both endemic in China, the bigger concern raised by the article was the threat of a bank run across China’s massive and unregulated, nearly $10 trillion shadow banking system. Indeed, while there have been numerous allegations and warnings that China’s entire shadow banking facade, dominated by WMPs and other “investment products”, is nothing but a giant ponzi scheme in which recoveries – should there be a bank run, a topic recently discussed on Bloomberg – would be non-existent if there is ever a bank run, defaults of WMPs issued by big banks – and this case an unapproved WMP – are rare, as are shadow bank runs.
For now.
However, in a stunning announcement made by one of China’s largest insurers, Foresea Life has warned of “mass defaults and social unrest” unless China’s regulator lifts a recent ban on its issuance of new products. In a letter to China’s insurance regulator, first reported by the Financial Times, Foresea Life Insurance which is a heavy investor in WMPs, has warned that the company expects “redemptions” of 60 billion yuan, or $8.7 billion, this year and might be unable to meet payouts unless it is able to sell new products.
…click on the above link to read the rest of the article…
