I’ve got the movers coming this morning, so this post has to be short. But I think this story merits a quick “check in”, even though the site of me in front of my computer will undoubtedly generate some serious consternation for my wife (…she has already warned me that she ‘needs my full attention’ today…). So let me get right to it:
Moody’s (the rating agency) has published quite the scathing report on Central Huijin’s debt offering and, more specifically, its intended usage (see the whole report here). Apparently, Moody’s has picked up on the “circular reference” embedded in this capital raising operation:
“Recapitalizing banks with bond proceeds from banks is credit negative because it increases the effective leverage of the banking system…The banks’ balance sheets are expanding so fast that they very quickly run into capital constraints. Huijin’s scheme propels growth through increased leverage. Its success relies entirely on real productive growth…pain lies ahead if China’s economic growth slows and the banking business model cannot adjust accordingly in time.”
That’s a pretty blunt assessment! I’m reminded of what Zhang Zhiming of HSBC said recently about this deal: “It’s one pocket in, one pocket out.” The implication is that there is a ‘slight of hand’ going on here. But there is more to this than just a redirection of capital isn’t there? This “presto chango” bailout actually results in an artificial increase in assets and equity that will in turn allow the banks to go about business as usual. And this serves to leverage up the entire Chinese banking system. So this is more of a “one pocket in, two pockets out” type of situation…which is probably why Moody’s has taken such an interest.
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