China's debt dragon

China's Banking Regulatory Commission stopped the Bank of China acquiring its AMC (China Orient,) that since failed to meet US$23 billion in bills due on June 30.

That the proposals were even under consideration seriously questions China's banking system as a whole.

June 2010, the CBRC revealed that AMCs could not pay interest or capital on their bank bonds.

2010 bank capital raising

The government guaranteed bonds represent substantial assets and inferred interest revenues streams on the four banks’ balance sheets.

The rush for nearly US$75 billion in capital raising by China's listed state banks to meet new capital asset ratio requirements is running parallel with the Agricultural Bank of China's world record initial public offering (IPO) and has a sense of unusual urgency bordering on panic. It also raises the question of why Beijing instructed the three listed state banks to defer their capital raising until the Agricultural bank completes its IPO.

This frantic rush for capital also coincides with a market flagging serious challenges for capital raising and serious concern that the US$75 billion appears seriously underestimated.

Unless Central Bank has problems of its own, the simple solution to capital raising is to call in the Central Bank guarantees on the bonds and outstanding interest, in line with the Ministry of Finance philosophy.

Stimulus effect

China's US$586 billion stimulus relied on 75 per cent bank lending of US$439.5 billion. Beijing directed the state banks to lend and SOEs to borrow.

Both readily embraced the challenge and bank lending reached US$1.466 trillion during 2009, nearly 350 per cent of the lending limit.

Anticipating lending restrictions, the 2010 first quarter lending frenzy was estimated to have driven total stimulus lending above US$2 trillion.

Companies borrowed not just for business needs, but speculation, reflected in the explosion of companies' property development divisions and subsidiaries. Using stimulus loans, companies also became private banks for their directors' investment activities, and for lending to individuals and private companies excluded from stimulus.

Property transactions were the main drivers of 2009 profits for many companies during a year of plummeting exports. Stock and property markets reportedly consumed more than 15 per cent of 2009 stimulus lending.