If you can read the title above (which I cannot), you’ll know that the Central Huijin Investment Ltd needs cash! According to “unnamed CIC sources” and “semi-official state newspapers”, Central Huijin may need as much as $50 billion. Why you ask? Because it is the majority shareholder of China’s four largest commercial banks, and they are in desperate need of recapitalization.
While it is a subsidiary of the CIC, Central Huijin’s investments are almost exclusively in domestic financial services firms. In addition, Huijin’s Board of Directors and Board of Supervisors are all appointed by (and remain directly accountable to) the State Council. As such, Central Huijin is, in effect, the tool through which the State Council exercises influence over domestic banking (see picture below).
During the financial crisis, the State Council called on the ‘big four’ banks to advance new loans to bolster the economy. The banks obliged; the Bank of China, for example, expanded its credit book by over 50 percent (!) in 2009. And today the government is calling on the banks to expand credit by another 17 percent in 2010.
However, by the end of 2009 the capital adequacy ratio of the Bank of China had dropped to 11.14 percent, which barely breaks the statutory requirement of 11 percent. Accordingly, the Bank of China (and the entire banking industry) is desperate to recapitalize.
The banks are thus launching aggressive fund raising programs in Honk Kong and mainland stock markets. However, the State Council doesn’t want to see its position in the big banks diluted (or so it says). As such, Central Huijin has put in a request for $50 billion to the central government so it can buy-in with the the private investors. (The money would ostensibly come out of foreign reserves.)
An alternative interpretation would be that Central Huijin needs the money because private investors aren’t all that keen on investing in a banking industry that 1) is expanding credit at breakneck pace and 2) is under the thumb of the central government. In my view, that isn’t a recipe for high returns. So perhaps the $50 billion is just another government bailout? We’ll see…
State Council really, really doesn’t want to see its stakes in the banks (or any other cornerstone of the economy) diluted. They’re not kidding about that. I suspect that anything Huijin needs will simply be tacked on to the sum CIC asks for its offshore portfolio.
Fifty bn does not look enough, if one also wants to address the inadequacy of certain instruments and methods used to arrive at the current Tier 1 levels. If people in the US become moer vociferous about “currency manipulation” they might as well become more critical of the capital structure of the SOE banks as a condition for permission to operate branches/ and or agencies in the US..I think that fifty is about the best they can do in the “private markets” and this fifty tops it up and maintains the current state ownership ratios. It is more complicated than it looks, because Huijin does not want to be treated as a bank holding comp[any, again fr US regulatory purposes, since that might result in several SOE banks being grouped together, Huijin becoming subject to much more US official curiosity, etc. So if the current proportions are just OK for both treatment as well capitalized and as sufficiently separate plus independent of Huijin, then is is worthwile to maintain them. Always interesting to watch, especially if the current situation is already the result of “forbearance” that could be withdrawn at any time. Who knows..
Thanks, guys. Interesting points. It’ll be very interesting to see what happens over the next month or so. Cheers.
Hi Folks: Great post and replies. I can only add that Central Huijin appears to be keeping this substantially off the radar of the Chinese financial press for the most part. The reports we have reviewed all suggest a sense that Chinese banks are looking for cash infusions for fear that some too large portion of their debt portfolios are bad. In that mix apparently might be loans to local governments. Also, when my research assistant went looking on line she found out that Morgan Stanley is going to sell its shares in CICC, a state owned investment bank (controlled by China Jianyin Investment Limited (43.35%) whixh is still owned by CIC I believe). Morgan Stanley currently holds 34.3% shares in CICC. This deal will make the 16-year cooperation between Morgan Stanley and CICC come to an end. I just found it out, but don’t know if this deal means anything, given that it is happening at this point. It was also reported that buyers can be Texas Pacific Group and KKR(Kohlberg Kravis Roberts & Co.).
Re CICC, I wondered at the time what the consequences would be for CIC, a just under 10% shareholder of a US bank holding company Morgan Stanley (and CIC/Huijin itself a BHC) of the injection of the remainder of CICC (an entity maybe controlled by MS) into CIC. I would guess that there might be a displeased regulatory response. Maybe there was. Anyway, MS is out. Who knows the answer? Will there be more of this sort of playing with US regulatory fire. Or was this just clumisness? Provoking the US regulatory system that had already bent over backwards? A way to get MS out of a potentially lucrative foothold?