China bank debts force share sales

Bank of China announced today that it was going to issue around 28 billion new shares in an effort to raise 8.9 billion dollars.

28 billion new shares will dilute the value of what present share holders have. In this case by about 10%. Trading in BoC shares was stopped until 5th July. Presumably to stop a mass sell off.

The real worry, however, in my opinion at least, is more serious than dilution for shareholders. It is the fact that it is only a few weeks since BoC, the third largest bank in China, raised $5.9 billion from debt sales to the bond market. At the time the head of the bank assured investors that that was it. The bank was super solvent and would not need to raise any more capital. It appears that was not quite true. I think it suggests a serious problem when China’s third largest bank finds that 5.9 billion dollars isn’t enough and needs another 9 billion just a few weeks later. 15 billion dollars is a big fix. What happens if it can’t raise the full extra 9 Billion?

China, both in Hong Kong and Shanghai is drowning in bond and share sales. At some point sooner rather than later the market will be glutted.

It has been in the press in China for some while that Chinese Banks are short of cash/capital. It was officially because the government had raised capital requirements for banks. That did indeed have an effect. But the banks are also stuffed with rapidly souring debts. AGAIN.

Remember these same banks were the ones from whom the government had to take about 287 Billion dollars worth of bad loans back at the end of the ninties. All those debts were hidden away in specially set up Asset Management Companies. Four were created – Cinda, Huarong, Great Wall and Orient. One each for China’s big four banks.

Needless to say none of the Asset Management Companies were anything more than shells that have never manged much more than continuing to make a loss. The shell game ‘saved’ the banks but one of the many problems with saving such bans is that it leaves in place running the bank, the same idiots who couldn’t run it before. And on the evidence of the last decade, they have not leaned a thing and have racked up another couple of hundred bilion in bad loans. This time their greed got them into a property bubble.

The Chinese Banks that lost a quarter of a trillion dollars in the 90’s, lent out a cool 1.4 trillion dollars worth last year alone. The bulk of it went into the property bubble. Much of it was lent to Special Investment Vehicles set up by Regional governments so they could inflate and speculate on their own property development. A vast amount of that specualtion now looks very, very dodgey.

So dodgey, in fact, that Bank of China, one of the Big Four, had to raise the $5.9 in bond sales and now, only a few weeks later, needs -not wants but needs – to raise another $8.9 Billion from shares. It can only be NEEDS given that they are going to crash into the much larger and longer planned IPO of Agricultral Bank of China, another of the Big four.

China’s banking system is stuffed with loans that are going to go bad this year and next. The government has still not finished losing money on the last several hundred billion dollars’ worth of bad loand from the last decade and here comes another load.