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China in last phase of solving ongoing liquidity / solvency crisis | Advantage China

Bailin temple (柏林禅寺) in Shijiazhuang,China

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Just six months away from targeted easing of monetary policy, China is navigating a potential liquidity and solvency crisis as Big 4 banks get new Capital injections and ahead of the decade long leadership change expected in 2012, many analysts question the further rise of the Yuan. While complete business towns engage the informal banking sector, lending to “entrepreneurs” at 5-6% per month rates not considered usurius, most Chinese citizens and outsiders have stopped investing in the Yuan.

Just less than a year ago, foreign investors in the US including McDonalds were allowed to seek Yuan financing from Dimsum bonds allowing them to invest in China business in the local currency without currency fluctuations.

Prioritise rural and SME lending

Bigger banks would prefer to lend to small and medium SMEs as ICBC stated a few weeks back. China has already reduced reserve requirements for banks lending in the interiors to 16%.  The bigger Chinese corporations have now been allowed to tap Dimsums offshore to ease liquidity concerns and ensure that the soft landing below 8% growth in China does not turn into a harder inconvenient bump even as the Central Bank would go ahead with easing monetary policy in 6 months despite impending changes in political leadership.

Political changes due in 2012

Chinese aver that the changes will last a decade and the relevant changes in bureaucracy and at most banking and economic regulators are already  in process. Last month CBRC the banking regulator got a new leader from the Securities regulator in a large scale swap of seats with bank chairmen

China’s Dimsums create additional liquidity | Advantage China

Deutsche Bank had followed the McDonalds’ offer with its own $2bln Yuan facility which was used to create a Dimsum index to track the new Yuan business JP Morgan has just been allowed to set up a $1.5 bln Yuan fund as a mutual fund business given new freedom in the last Strategic Dialog with the USA.

While inflation drop to 5.5% was expected, concerns about Yuan’s  plateauing at 6.35 has discourage FX investors forcing China to send more liquidity from the top of the system. It has doubled its Yuan swap with Hongkong to enable more Yuan business to Yuan 400 bln or  $63 bln In a similar vein Chinese non banking / manufacturing companies will now lead the foray into Yuan bonds called Dimsum bonds led by Baosteel. BaoSteel raised Cn 3.6 bln in the offshore $564 mln issue across 2, 3 and 5 year tenuresin a mixed basket at a competitive 3.125% for 2 years going to 3.5% for the 5 year bond

Hongkong holds Cn 622bln in Yuan deposits. Hongkong and China units of HSBC and Stanchart are among those able to leverage the local Yuan business in June and September though demand in China follows sharper peaks and troughs and has sharply fallen off since the currency “peaked” in October.

Meanwhile LGFV loans will be absorbed into the main balance sheets of banks and a fifth written off according to the current solution proposed by the banking regulator in September 2011







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