China Quietly Bails Out Another Bank With 620 Billion Yuan In Assets

Late last week, we argued that one could ignore China’s sinking retail sales, industrial production, capital expenditures, record low and declining sub-6% GDP and even its fading monthly credit injections and impotent credit impulse, and instead what matters most for the world’s second biggest economy with the world’s biggest financial system (at around $40 trillion, roughly double that of the US) is the following chart showing the market cap to total assets ratio for the four largest commercial banks in China, which as Saxo Bank found, hit a new all-time low of 5.8% in Q3 as total assets grew an annualized 8% in Q3 while market cap of the four banks declined.

This means that Chinese investors – who happen to know best what is truly going on behind the scenes – are not valuing these new assets as high quality, and the dynamic in China right now is that the current credit expansion is just offsetting the surge in bad loans, whose real amount Beijing has been keeping under wraps ever since the great bank debt for equity swap of 1999, but which we know is far higher the propaganda number of around 1.5% The net effect is zero credit transmission to the real economy in China constraining economic growth, which in turn makes banks especially vulnerable to failure as a result of even modest capital outflows.

Confirming that there is something fundamentally broken with China’s debt transmission mechanism and that, by implication, Chinese bad loans are soaring, two weeks after we reported that there was a bank run at Henan Yichuan Rural Commercial Bank which brought the bank to the verge of collapse, the WSJ reported that Harbin Bank, a politically-linked midsize Chinese lender based in the capital of northeast Heilongjiang province, became the latest Chinese financial institution to get a state bailout after its key private shareholders were replaced by government investors.

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