The Banking and Strategy Initiative

Chillin' out till it needs to be funded

China’s stimulus for Big Banks (may be counter productive)| Insight China

After a RMB 800B new credit by the big 4 in May or $126 Bln China’s intentions behind creating space on China’s Big Four Balance sheets with a securitization program that just takes current loans off balance sheet for sale as investment products, creates a wildfire speculative ring around their current economic activity.

This speculative ring it may be argued, probably encourages other such business known internationally from excess warehousing of commodity metals and shadow banking channels that are informally lending at higher rates or speculating in the Yuan that may bring back investors using other non official channels to lend monies and bring banks into the Basel III fold albeit in a pretty convoluted way, allowing banks to not grow their Capital base but reuse it and dismiss current debt to other holders.

While it may sound extraneous at this juncture to avowedly criticize much needed stimulus globally, it does not change the fact that the small tranches being tried for the securitisation may soon blow out into an important revenue source and a large off balance sheet risk still held  by banks’ SPVs . The first tranche will be 50 B RMB and it remains to be seen whether at the end of 2012 this 50 B indeed reaches new investors or if banks lend to

Greek Elections are over and Chinese investors may still be willing to risk more investments in the Eurozone though earlier episodes may have them worried in the case of BOC for example or cut them off as in the case of Safex organisation CIC (Safex being the organisation in charge of managing China’s overall trade and FX surplus

The “mini-me” stimulus program includes development funding for more Infrastructure and subsidies for the consumption sector. China has also increased access for global Banks and consumer businesses in this critical year.  The stimulus basically implies that day to day policy decisions will be flexible in light of the stunted growth and China will not allow hyper lending or large monetary stimulus to further queer the pitch.

According to a StanChart note quoted by FTAlphaville, the Investment project approvals will target 12 th 5 year plan objectives including rural, health, education and primarily rail and energy projects that empower manufacturing Supply Chains even as Chinese manufacturers look for overseas destinations for retaining export markets and the cost advantage rapidly slipping away and behind much of the China shutdown whose eradication is the mini stimulus objective


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