The Chinese banking regulator, worried by an unprecedented volume of loans by Chinese banks, recently let it be known that it expected the sector to adhere to much more stringent capital requirements. (In typical fashion, the Chinese regulator has since posted a note on its website denying that it was mandating a 13% ratio rather than the present 9 to 11%, and merely stressing the importance of “responsible lending.”) However, China’s banks have got the message and are now in frantic pursuit of more capital.
Banks could, in part at least, have met more onerous capital requirements by lending less and pushing more capital through to their reserve accounts. However, they have virtually all plumbed for the option of tapping their shareholders and the public for more money and shoveling that into their capital reserve while continuing their highly profitable lending activities at full throttle. This has led to a scramble to launch rights issues.
All of this looks, in some ways, like a dress rehearsal for what could happen in Europe and the UK when Brussels and the FSA finally decide that the time is right to stiffen up European banking capital requirements. The figure being cited in the press as the capital target for China’s top 11 banks is $43 billion, or ¥300 billion, according to BNP Paribas. This does not look like a particularly huge sum when compared to the billions the UK government, for example, has poured into the Royal Bank of Scotland and Halifax Bank of Scotland (HBoS), now Lloyds Banking Group. But it is a sufficiently large figure to have sent the benchmark Shanghai Composite Index into a tailspin for a few days when the market grasped the consequences of what the regulator wanted from the banks.
In part, concerns over the quality of the loan books in many Chinese banks are an inevitable consequence of the Chinese Government ordering the banks to lend heavily to the domestic economy during the global downturn. Banks shoved money out the door in the shape of emergency loans and, as a result, their capital adequacy rates fell to below 9% from over 10% at the end of 2008.
As Cris Sholto Heaton points out in a recent article in MoneyWeek, despite some investor skittishness, so far Chinese banks who have gone to the markets for cash have found the going a lot easier than UK banks in recent weeks. China’s Minsheng Bank, the first privately owned bank in China, only had to offer a 5% discount on its HK$30 billion Initial Public Offering (IPO).
By way of contrast, when Lloyds Banking Group wanted to raise a whopping £13 billion rights issue it had to bribe shareholders with a 60% discount. However, it remains true that investors will shy away if they feel that a deluge of commercial paper is going to devalue a sector and that is exactly the risk that the Chinese banks are now running. Coming on top of the jolt the markets got when Dubai World suddenly requested a six month moratorium on paying interest on its debts, all of this is yet another reminder that the global financial system is by no means out of the woods yet.
Shocks, or even mild alarms in one corner ripple through the whole global structure. It remains to be seen whether there is sufficient appetite in the broader market for the massive sums being sought by Chinese banks. European regulators will be watching with interest, since at some point if Europe’s banks do not voluntarily start “buffering up” the regulator is going to have to push them in that direction.
- Equity Issues by Listed Companies: Rights Issues and Other Methods, by Seth Armitage
- Options for Raising Finance [Checklist]
- Viewpoint: Richard A. Werner, Understanding and Forecasting the Credit Cycle—Why the Mainstream Paradigm in Economics and Finance Collapsed
Tags: Asia , banking , capital adequacy , China