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…