China is creating bank capital out of thin air–and that’s not good
You’ve got to give China’s most recent effort to increase the capital of China’s largest banks big points for chutzpah.
That’s not exactly an endorsement for these banks as investments, however. Or of the soundness of China’s troubled banking system.
On August 24 Central Huijin Investments, which is the domestic arm of the government’s sovereign investment fund China Investment Corp., sold $6 billion in bonds in the first of a series of bond sales designed to raise $27 billion that Central Huijin will then invest in the country’s big state-controlled banks. The goal, laudable in itself, is to increase the capital reserves at these banks.
Update HSBC (HBC)
It’s by no means a done deal—nothing is in South Africa these days—but Nedbank, the South African bank majority owned by insurer Old Mutual (OML.L), is HSBC’s (HBC) deal to lose.
HSBC beat out rival Standard Chartered (SCBFF.PK) for the right to hammer out a formal offer to acquire South Africa’s fourth largest bank over the next two months. I think HSBC will pull it off. Old Mutual own 51% of Nedbank and the insurer is a motivated seller because the company is selling assets to pay down debt. HSBC won’t be able to gain 100% of Nedbank’s outstanding shares because South African law reserves a percentage of shares for black investors. But the company should be able to gain the 70% of shares that it has said will let it achieve it strategic goals.
And what are those goals?
First, but not foremost, HSBC wants to gain a foothold in Africa’s largest economy.
Euro (central bank) politics kill the euro rally–dead
If this is what a euro hawk is saying now, the European Central Bank will be in the emergency lending business well into 2011. That would match the U.S. Federal Reserve’s recent promise (most recently from Fed chairman Ben Bernanke today, August 27) to continue its policy of depressing long-term interest rates by buying Treasuries and mortgage-backed securities in the open market if the economy needs a boost.
The comments came on August 20 from Axel Weber, the head of the Bundesbank, Germany’s notoriously conservative No-inflation-at-any-cost central bank. Weber, a member of the European Central Bank’s governing council, said the ECB should help banks through the end of the year by continuing its current emergency lending policy.
I’d guess that might be the end of any chance for a euro rally against the U.S. dollar or yen in the rest of 2010. One reason the currency had climbed until recently was speculation that the European Central Bank would start to rein in the euro money supply before the U.S. Federal Reserve did. (And that, while still a long way off, the ECB would raise short-term interest rates before the Fed did in the United States.)
“It’s clear that we need to re-embark on a normalization procedure,” Weber said in tossing a bone to the inflation hawks, but any normalization will have to wait for consideration in the first quarter of 2011. The euro dropped and the yield on Germany’s 30-year bond fell to a record low on his comments.
Weber is one of the leading candidates to succeed European Central Bank president Jean-Claude Trichet in 2011. Opponents to his selection have argued that he’s too much in the mold of a Bundesbank inflation fighter and isn’t a good choice to guide euro monetary policy at a time when growth and jobs are the big issues. I read Weber’s comments as an effort to signal any wavering voters that he will be sufficiently flexible.
McDonald’s financial secret sauce contains yuan
Want some yuan with that Big Mac?
On August 19 McDonald’s (MCD) became the first foreign non-financial company to sell yuan-denominated bonds in Hong Kong.
The U.S. company sold 200 million yuan (about $30 million) of 3% notes due in September 2013. Standard Chartered (SCBFF) was the manager on the sale.
The sale marks another step in China’s plan to create a financial system on a par with the markets in Tokyo and New York. That will eventually require China to turn the yuan into a freely exchangeable currency and China is certainly not willing to go there yet. But in February foreign companies became eligible for the first time to sell yuan-denominated bonds in Hong Kong.
It makes sense for McDonald’s to tap into the Chinese funding pool since it is now a familiar brand name in China.
China’s new bank stress test is so tough it signals trouble ahead
Now that’s a stress test.
Bank regulators in China said on August 5 that the country’s stress test of its banks will include a worst-case drop in real estate prices of 50% to 60% in the country’s most speculative markets.
Take that Euro Zone and even the United States where stress tests of the banking system that showed just seven and 10 banks, respectively, needed to raise additional capital have been widely criticized as too lenient.
But before you start cheering on the news that a country is finally getting tough on testing its banks, consider this possibility: China is publicizing how tough its test will be not because it thinks its banks are in good shape (and will pass an honest test) but because is becoming increasingly worried that investors are losing confidence in the country’s banks just when those banks need to raise billions in new capital to fix portfolios swamped with bad loans.
In other words, consider the possibility that what looks like a sign of strength is actually a loud signal of growing weakness in China’s banking sector.
Hey, it wouldn’t be the first time, would it, that a country had cynically designed a stress test with the purpose of reassuring investors that its banks were safe? The euro and the U.S. stress tests were exactly that kind of exercise, after all.
Think I’m being too cynical? (Can you be too cynical about bank accounting in any of the world’s markets?)
