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Where Did China’s Loans Go?
07/06/2011 3:37 pm EST
China’s banks are in more trouble than investors thought.
That’s the message in the warning from Moody’s Investors Service, and the decision by Temasek, Singapore’s national investment fund, to sell shares in two of China’s biggest banks.
Yesterday, Moody’s warned that the recently completed government audit of loans by local-government financing platforms might have missed a few loans. Last week, China’s first audit of local governments found that provinces, cities, and counties owned about 10.7 trillion yuan ($1.65 trillion).
Moody’s calculates that the audit missed about 3.5 trillion yuan, or roughly $540 billion in loans. Most of these, according to Moody’s, weren’t included in the national audit because they weren’t properly underwritten, and thus couldn’t be classified as government loans.
As a result of that sloppy underwriting, and other problems with the loans, as many as 75% of them could go bad. That would push the bad-debt ratio for China’s banks up to 8% to 12% of all loans, instead of the 1% bad-loan ratio now officially calculated.
Yesterday Temasek sold its shares in two of China’s biggest banks for an estimated $3.6 billion. Singapore’s sovereign investment fund sold $2.4 billion of shares in Bank of China and $1.2 billion in shares of China Construction Bank.
Temasek, which has played a role as a core institutional investor in the initial public offerings of China’s big banks, didn’t reference the Moody’s news, so investors don’t know if there’s any connection.
In February, Temasek completed an internal review of its holdings in China’s big government-owned banks. At the end of March 2010, Temasek had owned 4% of Bank of China and 6% of China Construction Bank.
Despite its findings, Moody’s wasn’t urging investors to sell China. Moody’s did not anticipate a downgrade on China’s debt, one of the authors of the report, Yvonne Zhang, told the Financial Times. The banks appear to have started to get a handle on the debt problem, she said.
And Moody’s remains more optimistic than Fitch Ratings, which warned earlier this year that China’s banks could eventually see bad loans reach 30% of their portfolios.
My own view is not so much optimistic or pessimistic, as cynical. The big banks that went public recently were essentially bankrupt...until Beijing began injecting capital and selling off their huge portfolios of non-performing loans to special entities, set up for the single purpose of taking that debt off banks' balance sheets.
What China has done once, China is certainly willing to do again.
Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.
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