Not a pro here, but willing to share some thoughts. If you check the historical PER around 2009 to 2011 period, it's about 10 to 12x. ICBC wasn't that "cheap" compared to now.
There could be a few factors that contribute to this...
1. US banks are selling, probably to recap their capital at home. Or the agreed term for holding ICBC has expired. Chinese government sold ICBC cheaply to Goldman many years back, hoping for western knowledge transfer. But there's a time limit for Goldman to hold those stocks.
2. The domestic FD rate is about 3.2%, which makes holding ICBC at 6% yield not too attractive.
3. Too much negative western publicity about the health of Chinese banks. "Shadow banking" term used by media create fear among investors. When China's economy's Growth rate slows, albeit growing, but slower rate, the media starts to publish tonnes of stories about the potential hazard of non-performing loans (NPL). This is good news to investors! We get cheap stuff!
If ICBC can increase dividend by 10% annually, ceteris paribus, you may enjoy capital appreciation of 10% annually. I guess most investors buy boring ICBC shares for dividend. Together with dividend of 6%, that's about 16% return. If this trend continues, you can keep it forever.
I will sell this share, if I found out that the book is "cooked" or Chinese economy is a big bubble that's waiting to burst, or the PER hit around 20x. Kindly correct me if I'm wrong in any statement above.
(22-01-2014, 06:03 PM)Wildreamz Wrote: [ -> ]By the way, another reason I favor ICBC over the other 3 state owned banks is due to this guy.
It may be an innate bias, but I generally find businessmen with background as an academic more trustworthy.
You may want to read another side of story...
http://club.kdnet.net/dispbbs.asp?id=7788564&boardid=1
姜建清还是不是人？
作者：方飞
首先，姜建清是人。如果姜建清不是人，他怎么能够担任中国工商银行的董事长？
从“新浪财经人物”上得知：姜建清于1953年2月在上海出生。1970年去江西插队，后来又到河南一个煤矿工作了3年。1979年回到上海，从此和银行工作结下了不解之缘。进入银行大门之后，姜建清抓紧充实自己，边工作，边读书。1984年他从上海财经大学毕业，此后又相继在上海交通大学攻读硕士和博士研究生，并获得了硕士和博士学位。此外他还在美国哥伦比亚大学进修过一段时间。姜建清不仅具有丰富的金融工作经验，而且对金融理论也很有研究，发表过大量学术文章和论著。
又从2011年9月18日的新加坡《联合早报》上得知，“美国权威财经杂志《彭博市场》首次推出的年度全球金融50大最具影响力人物榜单中，中国副总理王岐山、央行行长周小川，以及中国工商银行行长姜建清和中国投资集团CEO楼继伟榜上有名”（见《全球50大金融人物 中国四杰上榜》）。
以上都足以证明，姜建清不仅是人，而且是人中的精英。
但，又为什么要问姜建清是不是人呢？因为按民间的观点，对一些虽然是人，但干的事恶劣或者不符合人的常规的事情，老百姓往往骂他不是人，姜建清就有这样的事例。
一、中国工商银行是中国国有银行中对员工剥削最残酷的银行
姜建清之所以被美国权威财经杂志《彭博市场》评为年度全球金融50大最具影响力人物之一，是因为“资料显示，中国工商银行是全球市值最大、盈利最多和客户存款第一的商业银行” （见《全球50大金融人物 中
国四杰上榜》）。
市值最大、客户存款第一，不应该算为姜建清的功劳，这是中国金融体制决定的。中国的四大国有商业银行，政府分工明确，工商银行负责城市和工商企业的业务，农业银行负责农村农民的业务，建设银行负责固定资产投资的业务，中国银行负责外资外汇的业务，后来虽然规定可以打乱，但一开始，工商银行就在市值和客户上抢了先，可以说，任何人当工商银行的行长，都能够做到这样。
盈利最多，倒的确是姜建清的功劳。但按北京大学教授张维迎的观点：“如果没有自由竟争，靠政府垄断，只允许一部分人干，这不是市场的逻辑，是强盗的逻辑。就像国有银行，赚那么多钱，有相当一部分是靠强盗的逻辑。你存款时它只付百分之一二的利息，而它贷款时收取百分之五六的利息，这么大的利差，傻瓜都能赚钱。银行的高利润，有一部分靠的是剥削储户，而不是创造价值”（见张维迎《市场制度最道德》），因而姜建清也只是一个傻瓜。
但是，中国工商银行为什么会是全球盈利最多的银行？除了张维迎教授说的是剥削储户外，再就是对员工的残酷剥削超过了中国的任何银行。为此，姜建清采取了两个手段：
一是把10多万工商银行的员工踢出去。一份《毛主席把工行员工请进来，姜建清把工行员工踢出去》的帖子说：“开门见山说买断, 断友都被工行骗, 他们操纵政策耍手腕. 先用买断来做宣传, 说工行今后无发展。效益差的支行都撤完, 二级分行人员减一半. 员工的合同到期不续签, 先买断的能拿点钱, 后买断的无钱自了断, 员工听了今后无戏看, 只好跳进设好的圈. 便交了申请买了断, 申请交了他们不给钱, 逼着把申请内容全改变, 将买断改为自谋又自愿, 给了一点点卖命的钱, 员工发现受了他们的骗, 收回申请他们说没法办, 剥夺了我们的生存权, 骗子到是如了愿, 给国家和社会添了乱, 总理讲和谐社会求发展, 可工行把员工推向死亡线. 牺牲员工给领导奖钱，减员一名奖给领导六万，同志们把青春年华奉献完，便被骗出工行无人管”。
帖子还说：“从2001年开始到现在，十年了，我们买断职工多年投诉，多年上访到现在都没有结果。石油，邮电，移动，政府各机关，电力等自谋职业人员和买断人员都得到了圆满的解决，有的继续上班，有的办理了退休，保险公司还一直给自谋职业职工上着三险和公基金呢！单单工行自谋职业和买断职工没有得到解决，做为世界500强企业来说，是喝着买断和自谋职业职工的血长大的，买断员工大部分都是经过国家人事部门批准的正式国家干部.是从人民银行行过度到工行的是建设工行的元老.可以说是建设工行的功臣.可是正当我们为把工行建设的有声有色逐渐强大而心理喜悦并下决心把各项工作做的更好使工行冲向世界之时.家里上有老下有小需要抚养之日却被工行的不是人养的决策者姜建清采取蒙骗、诱导、恐吓、哄，等手段，片面解释政策，故意隐瞒实质，人为虚设假象，强行解除了我们的劳动合同。十年来的上访和艰辛的生活是何等的漫长、何等的艰难，是何等的凄凉，又是何等的无奈与辛酸。我们已经满面沧桑、鬓发斑白，买断在我们身上留下了无情的烙印，把我们的心灵摧残，剥夺了我们的退休、住房、医疗、保险等保障及福利，使我们地位低下。农民有地种，工人有班上，失业有人管，得病有人治，而我们呢，什么都不是，十年了，没人理，没人问，多少人因此郁闷而死，多少人重病缠身，多少人卧病在床，多少人妻离子散，多少人流离失所、无家可归，多少人没有收入、无法生存，多少人精神受到打击，寝食难熬，多少人没有了欢笑，度日如年。我们上无片瓦，下无寸土，我们过着无党、无组织、无单位的艰难‘三无’生活，成了社会中最弱最弱的弱势群体，我们无依无靠，经常受别人的嘲弄，看别人的冷眼，有的生活贫困已到了危机生命边缘，我
们已从中年向晚年迈进，无任何保障，成天过着提心吊胆伴着眼泪的生
活。”
二是给现有员工最低的工资待遇。据新华网2011年5月5日的一篇报道：《上市银行薪酬曝光：三银行人均薪酬超23万》披露，工商银行的员工的工资均是中国所有银行员工中最低的，年人均5.11万元，只有年人均薪酬超23万银行的22.22%，是建设银行的56.1%，是中国银行的59%，是农业银行的65.68%。2006年以后退休的工商银行的员工每月只有退休金1500来元，同样是建设银行退休员工的56.1%。
姜建清为了捞取世界盈利最多的银行的称号，不惜以牺牲员工的正当利益，这是人做的事吗？如果将这样的人封为“人杰”，是对人性的最大的亵渎！
二、中国工商银行领导层是中国国有银行领导中最腐败的领导层
（一）在姜建清的领导下，中国工商银行领导层的工资待遇保密的。采取的办法是：省级银行领导的工资待遇在国家银行发，市级银行领导的工资待遇在省级银行发，类推，因而本级银行的员工根本不知道他们的领导发了多少工资。这种不公开，就叫做见不得人。只有腐败的事情才见不得人。
（二）姜建清的奢侈浪费超过了国家电力局的高严。中国工商银行领导层挥霍了多少“三公”经费，至今仍然是机密。但从一件事情可以看出端倪。
据传，姜建清2009年来湖南，不知道是因为知道自己对员工太残酷而担心员工报复，还是为了贪图享受，显示气派，他和他的随从竟然包住了湖南省某宾馆的一整栋楼。其作风、其派头，何人能比?
以往，只传闻2000年国家电力公司召开的一个内部人事干部会议，短短3天时间竟然挥霍了304万元，人均耗费2.4万元。国电公司原总经理高严甚至在国家领导人住过的东湖宾馆花费6万元定了一套特大套房，并专门订做了实木家具。高严后来叛逃国外，是叛逃到国外尚未归案的级别最高的贪官。如果姜建清的此情属实，其奢侈浪费，比高严不知又“高”出了多少倍……
更加重要的是，姜建清来湖南省如果是如此，到其它地方又何尝不是如此？这些垄断企业的“老总”究竟挥霍浪费了国家多少资财，党中央和国务院为什么不对他们查处？
三、中国工商银行是对于人民群众来信来访最置之不理的银行
近几年来，由于姜建清的倒行逆施，激起工商银行员工的普遍不满，他们多次向来信向姜建清反映，期盼解决，但姜建清一律置之不理。
这种置之不理也可以说明姜建清已经不是人。因为人与动物的区别在于人有感情，人会说话。假如张三喊李四，李四一定回答；假如张三喊牛、喊猪、喊狗等动物，他们就不会回答。因为他们是动物，他们不会说话。
凡是人，都相互有感情。特别是作为领导人，更应该对属下有感情。胡锦涛说群众利益无小事，胡耀邦每天都给来信来访的人民群众回信，毛泽东更是非常重视人民来信，并尽可能地回信。据不完全统计，1950年5月上旬，他就回了将近80封信，仅5月7日一天就回了18封信。
所以，这种对于人民群众来信来访置之不理的官员，不仅称不上是官员，因为丧失了做人的起码功能，因而实际上也就都不是人！
（写于2011年9月19日）
From Goldman Sachs Global Investment Research.
Q. What has happened?
Local and international media (e.g. Caixin, Financial Times) have reported that a RMB 3bn three-year investment trust issued by China Credit Trust Company (CCT) is at risk of not making its principal repayment due investors on January 31 (which also happens to be the first day of the Chinese New Year). The trust assets were used to make a loan to a coal mine company for mine acquisition and related investments, but the company has still not received licenses related to two of five planned mines, and the owner of the company was reportedly arrested in 2012 for illegal deposit taking. It has been reported that ICBC referred the project to CCT, which structured the trust product as a “collective trust” rather than a “single trust” that typically is used by banks to securitize loans. The trust was sold through ICBC to approximately 700 private banking clients, and reports suggest that ICBC will not guarantee investors in the trust against losses. Our China banks team published detailed information on the trust structure, as well as shareholders and financials of the trust company (see “CCT trust product risk; potential scenarios imply slower trust/TSF growth”, January 20, 2014).
Q. What exactly is a Chinese “trust” and how is it structured?
A trust is essentially a private placement of debt. Investors in the trust must meet certain wealth requirements (several million RMB in assets would not be unusual, so the investors are either high net worth individuals or corporates) and investments have a minimum size (e.g. RMB 1mn). The appeal is a much higher yield than can be obtained through conventional bank deposits, in many cases 10% or higher, versus regulated multiyear bank term deposit rates in the low single digits. Trusts invest in a variety of sectors, including various industrial and commercial enterprises, local government infrastructure projects (via LGFVs), and real estate.
As our banks team noted, 29% of trust assets are invested in higher-risk industrial or commercial sectors.
A trust is not to be confused with a “wealth management product” (WMP). WMPs are available to a broader group of individuals, with much smaller minimum investments. They are typically sold through and managed by banks or securities brokers, with or without a guarantee of the payment of interest or principal (WMPs featuring explicit guarantees are booked on banks’ balance sheets; for other non-principal guaranteed products, implicit guarantees may be assumed by some investors). Funds from WMPs may be invested in a range of products including corporate bonds, trust loans, interbank assets, securitized loans, and discounted bills—so WMPs are best thought of as a “money market fund” or pool for other financial products.
Q. How do trusts fit within the “shadow banking” sector in China?
Trust assets total some RMB 10trn as of late 2013. Though small as a share of the total stock of credit in China (Exhibit 1), trust assets have been growing at an annual rate of over 50% in recent years. The net new credit extension from trusts approached RMB 2trn in 2013 based on estimates from our bank analysts, or more than one-tenth of broad credit flow (total social financing) for the year. (Please refer to the “CCT trust product risk” note cited above for further detail on trust asset growth and composition.)
Some clients have asked about comparisons between the Chinese trusts and the SIVs (structured investment vehicles, sometimes known as “conduits”) that were prominent in the US financial crisis. The SIVs were off-balance sheet vehicles generally funded with short-term commercial paper (“asset-backed commercial paper”) with a period of a few days to a few months. Initially, these SIVs invested in relatively low risk, short-term receivables, although over time exposures shifted towards more complex, longer-term structured products such as subprime mortgage-backed securities or collateralized debt obligations. As doubts about asset quality began to arise in 2007, market funding conditions for the SIVs quickly deteriorated, requiring sponsoring banks to provide liquidity support and ultimately consolidate these assets on the balance sheet, which exacerbated funding pressures as well as asset write-downs. Similarities to Chinese trusts include the linkages with banks, the off-balance sheet nature of the trusts (true for many WMPs also), and the maturity transformation aspect (though it should be noted this is less extreme in the case of trusts, where investors are often committed for a period of a year or more, than for most SIVs; even WMPs typically have commitments of 3-12 months). Important differences include the relatively simpler assets of Chinese trusts – often loans, as in the CCT example – and the fact that the Chinese banking system is funded domestically (many SIVs raised funding across borders).
Q. Why is the potential default of a trust important?
With a large volume of trust products scheduled to mature this year, who bears the losses in the event of a default could set an important precedent. In our detailed research on the China credit outlook last year (see “The China credit conundrum: risks, paths, and implications”, July 26, 2013), we explicitly identified “removal of implicit guarantees” as one of four potential ‘risk triggers’ for a broader credit crisis. If the realization of significant losses by investors causes others to pull back from funding various forms of “shadow banking” credit, overall credit conditions could theoretically tighten sharply, with consequent damage to growth.
From the perspective of policymakers, the default of a trust under the current circumstances might be seen as having less risk of contagion than some other “shadow banking” products. First, the trust is explicitly not guaranteed by either the trust company or the distributor. Second, the investor base of a trust is typically a relatively small group of wealthy/sophisticated investors (the minimum investment in the CCT trust mentioned above was RMB 3mn). This contrasts with broadly offered wealth management products, which have many more individual investors with less investment experience and more modest personal finances. Third, the particular circumstances of this trust (lending to an overcapacity sector, failure to obtain key business licenses, arrest of the borrowing company’s owner) might make it easier for authorities to portray as a special case. Put another way, if the authorities felt obliged to provide official support to this product, it is not clear under what circumstances they would be comfortable letting any trust or wealth management product default.
Q. What are the options for policymakers?
The fundamental issue for policymakers is how any losses would be distributed among 1) investors, 2) the trust company and/or distributing bank, 3) the government and government-related entities. Potential options include:
Allowing the trust to default (investors take losses). As noted above, this would call into question the implicit guarantees perceived by some trust buyers, thereby increasing the risk that new trusts or other non-guaranteed products such as WMPs face more difficulty obtaining funds, leading to tighter overall credit conditions. On the positive side, it would encourage greater focus on the underlying credit quality and better risk pricing going forward.
Trust company and/or distributing bank provide support (levered institutions take the principal and/or interest losses), making an implicit guarantee explicit. Although legally there are no guarantees of principal from either the trust company or ICBC, to the extent the trust company manager or the distributing bank were obligated by policymakers (or other reputational or legal considerations) to provide support, it could prompt loss recognition, or at the worst a need for capital raising or shrinkage of the balance sheet if losses are substantial. As such, the quality of the underlying assets and due diligence are key to determine whether and how much losses might be taken by these institutions. Investor demand for trusts might rise after such a demonstration of support, but the higher perceived liability on the part of financial institutions would presumably reduce their appetite for issuing such products in the future.
Government-backed entity provides support (government takes losses). In this case, the short-term market reaction would presumably be relief, as refinancing risks would be reduced and both banks and trusts would be off the hook. However, moral hazard for both issuers and investors would be increased, raising the risk of credit problems further down the road. Policymakers might try to minimize this moral hazard by providing support indirectly (via some government-supported entity or third party, rather than publicly and directly) and/or by providing only partial support. An example of the former occurred last year, when an “unnamed party”, possibly the local government which provided some land collateral and guarantees to the trust loans, intervened to purchase the defaulted loans of a steel plate manufacturer, enabling the investors in a CITIC WMP to be repaid fully (see “Latest China bailout reveals risk of local government’s hidden debts”, Reuters, May 7 2013).
Some mix of these options is of course possible, if the financial institutions or government provides partial support. Most observers seem to expect at least a partial bailout of the investors, reflecting a compromise between concerns about moral hazard and concerns about contagion. Unless there is a total bailout explicitly funded by the government, credit conditions in the trust sector seem likely to tighten at least modestly. Some central government level policymakers could be open to seeing a default, as it would encourage more careful risk assessment and help to contain credit growth going forward. However, other central government and many local government policymakers might be more inclined to contain the problem. Local officials in particular may feel more pressure to support key local enterprises that are major employers and taxpayers; in the current case, officials could in theory take actions such as granting mining licenses to make the trust assets more valuable.
Q. What should investors watch to track the broader market impact?
Besides the immediate news on what approach officials take in the case of the CCT trust, investors can watch other financial metrics for signs of stress. As always, interbank rates are useful as an indicator of the marginal cost of bank funding. Spreads to yields on nonbank products may reflect their perceived risk, although they could also be affected by other factors such as tight overall liquidity conditions. While we do not have high frequency data on trust yields, WMP yields have moved higher of late. Finally, data on credit volumes will be important to watch. To the extent conditions tighten, this should become visible in monthly total social financing flows (the trust portion in particular).
Q. What is the potential impact on economic growth and markets?
The growth impact of a trust default is highly uncertain, as it represents the product of two unknowns. The first unknown is the change in overall credit extension which would result from the default, and the second unknown is the sensitivity of economic growth to new credit. In work last year on the relationship between credit and growth (“The ‘credit impulse’ to Chinese growth”, April 11, 2013), we estimated a RMB 300bn change in the average monthly credit flow would have an impact of 80bp on sequential annualized real GDP growth in the following quarter (with further, gradually fading effects in subsequent quarters if the lower credit flow persisted). This is not far from the average monthly flow of trust loans in 2013 implied by our bank analysts’ estimates. So with our assumption on credit sensitivity, a hypothetical sharp tightening in funding conditions that stifled this flow of new credit (not affecting existing trusts) would imply an 80bp hit to sequential (annualized) growth the following quarter, and roughly a 50bp hit to yoy growth over the following year. Intuitively, the modest estimated impact stems from the small size of the trust sector in the overall financial system. We emphasize the very high degree of uncertainty in these calculations—this is a back-of-the-envelope illustration rather than a forecast. On the side of a smaller effect, officials could take steps to reduce the impact on trust lending or other lending channels could pick up the slack; on the side of a bigger impact, spillovers could occur to non-trust lending or to the real economy via effects on business or consumer confidence.
In the credit markets, more willingness to allow losses should lead to greater differentiation between stronger and weaker credits. This is a theme we have emphasized for some time, including in our in-depth work on the China credit outlook last summer.
A policy/credit tightening bias may put pressure on China equities in the near-term, particularly credit-dependent, investment-heavy cyclical sectors. Investors are unlikely to reward either option 1 or option 2 above, as the default option may trigger contagion and risks to growth (thus earnings as well) and the “bailout by financial institutions” option is structurally unappealing (thus risks valuation). Option 3 is probably the only outcome that would support a slight market rebound near-term, in our view, as immediate contagion is averted and listed financial conditions are protected from bearing losses—though at the cost of longer-term moral hazard.
Come to think of it, makes much more sense that the investors, sales ie banks, structurer ie trust and govt (provincial or central) each take 25% of the loss. With pain they will think thrice before doing these things again and the whole value chain wil learn rather than just the investors. The disincentive will likely raise the quality of products yet also the yield/credit considerations in future.
By Bloomberg News
Jan. 23 (Bloomberg) -- Investors in a troubled trust product distributed by Industrial & Commercial Bank of China Ltd. met with the lender’s officials at a private-banking branch in Shanghai, demanding their money amid concern of a default.
Individuals were asked to sink at least 3 million yuan ($496,000) in the 3 billion-yuan Credit Equals Gold No. 1 product amid guarantees that it was “100 percent safe,” said Fang Ping, one of 20 investors who went into the branch. The product, which comes due on Jan. 31, raised funds for a coal mining company that collapsed after its owner was arrested.
“ICBC is taking advantage of their private banking customers,” said Alex Ke, 45, before joining his fellow investors in the meeting. “We’re victims in this. This is a shocking scam.”
ICBC, the trust’s issuer and the government may bail out the product, Time-Weekly reported today. A default would shake investors’ faith in the implicit guarantees offered by trust companies to draw funds from wealthy investors. Assets managed by China’s 67 trusts soared 60 percent to $1.67 trillion in the 12 months ended September even as policy makers sought to curb money flows outside the formal banking system.
China Credit Trust Co., based in Beijing, created the product, which raised funds for Shanxi Zhenfu Energy Group. Wang Zhenning, an ICBC spokesman, declined to comment when contacted by telephone today. Two phone calls to the office of China Credit Trust Board Secretary Wei Qing went unanswered.
Raised Voices
Raised voices were heard periodically from inside the ICBC branch where the meeting, which started around 11:15 a.m. Shanghai time, was held. Credit Equals Goal No. 1, which has a tenure of three years, promised an expected annual return of 10 percent, according to information on China Credit’s website.
ICBC assigned China Credit the top A ranking in 2009 under a four-step scale by which the lender rates its trust partners, according to a marketing presentation for the Credit Equals Goal No. 1 product that was obtained by Bloomberg News. The presentation included a page detailing risks attached to the coal industry such as slower economic growth and the prospect of emission controls lowering coal demand.
“If they don’t settle this by Jan. 31, we’ll meet in Beijing,” Chen, a Shanghai investor aged about 50 who declined to give his full name, said before the meeting. “In Beijing, there’ll be more people. We know that investors from Guangzhou will also gather there for this.”
Bailout Plan
ICBC and China Credit may each take responsibility for 25 percent of payments for the product, while the government of Shanxi province, where the failed coal miner was based, may take responsibility for the remainder, Guangzhou city-based Time-Weekly reported on its website today.
The final version of the bailout plan may only be known next week, according to Guangzhou city-based Time-Weekly, which is owned by Guangdong Provincial Publishing Group.
ICBC had rejected calls to bail out the product it distributed for China Credit, a bank official with knowledge of the matter said Jan. 17. Shanxi Zhenfu’s owner, Wang Pingyan, was arrested in 2012 for taking deposits illegally, according to the Shanghai Securities News.
ICBC won’t assume primary responsibility for the product, according to the executive, who asked not be identified while negotiations continue.
Trust Rules
“It’s a problem with the sales and marketing of these products,” Liu Mingkang, former head of the China Banking Regulatory Commission, said in an interview from the World Economic Forum in Davos, Switzerland. “They should have made clear that the return rate is not guaranteed and what kind of risks are involved. There shouldn’t be an ironclad guarantee at all.” China’s banking watchdog regulates trusts.
According to a CBRC rule that took effect in March 2007, trust companies should declare risks to subscribers when they set up trusts, including that there’s no guarantee of principle or minimum returns. Risks arising from management of the trust assets in accordance with trust plans are assumed by the trust assets, according to the rule.
Trust companies need to compensate losses with their own assets in the event of mismanagement of the trust assets or breach of trust plans, and investors should assume the remaining losses if trust companies’ own assets are not enough to cover the losses.
Biggest Shareholder
State-owned People’s Insurance Company (Group) of China Ltd. is China Credit’s largest shareholder with a 32.9 percent stake, according to the credit firm’s website.
A project backed by the product obtained a new mining license, the Securities Times reported yesterday, citing a statement from China Credit. Another coal mine project has won support from local authorities and the community, it said. Obtaining licenses will permit the mines to start operating and produce coal for sale.
China should allow defaults of some wealth-management and trust products to reduce incentives for financial institutions to sell risky products and maintain stability in the financial system, Ma Jun, Deutsche Bank AG’s chief China economist, wrote in a report this week.
Trusts, along with banks’ wealth-management products and private lending among individuals, make up China’s shadow- banking system, which JPMorgan Chase & Co. estimated in May to be worth $6 trillion. The figure is equivalent to 69 percent of the nation’s 2012 gross domestic product.
Shadow Banking
China’s trust industry is now larger than the insurance and mutual fund sectors, McKinsey & Co. and Ping An Trust Co. wrote in a report in November.
The State Council, China’s Cabinet, has taken steps to rein in shadow lending, National Development and Reform Commission spokesman Li Pumin said Jan. 22, according to a briefing transcript posted on China.com.cn, a government-run website. The commission will actively participate and promote the measures, Li said, without elaborating.
The State Council imposed new controls on shadow banking that include a ban on using third parties to evade restrictions on lending directly to certain borrowers, three people familiar with the matter said this month.
(23-01-2014, 06:17 PM)minimax Wrote: [ -> ]From Goldman Sachs Global Investment Research.
Q. What has happened?
Local and international media (e.g. Caixin, Financial Times) have reported that a RMB 3bn three-year investment trust issued by China Credit Trust Company (CCT) is at risk of not making its principal repayment due investors on January 31 (which also happens to be the first day of the Chinese New Year). The trust assets were used to make a loan to a coal mine company for mine acquisition and related investments, but the company has still not received licenses related to two of five planned mines, and the owner of the company was reportedly arrested in 2012 for illegal deposit taking. It has been reported that ICBC referred the project to CCT, which structured the trust product as a “collective trust” rather than a “single trust” that typically is used by banks to securitize loans. The trust was sold through ICBC to approximately 700 private banking clients, and reports suggest that ICBC will not guarantee investors in the trust against losses. Our China banks team published detailed information on the trust structure, as well as shareholders and financials of the trust company (see “CCT trust product risk; potential scenarios imply slower trust/TSF growth”, January 20, 2014).
Q. What exactly is a Chinese “trust” and how is it structured?
A trust is essentially a private placement of debt. Investors in the trust must meet certain wealth requirements (several million RMB in assets would not be unusual, so the investors are either high net worth individuals or corporates) and investments have a minimum size (e.g. RMB 1mn). The appeal is a much higher yield than can be obtained through conventional bank deposits, in many cases 10% or higher, versus regulated multiyear bank term deposit rates in the low single digits. Trusts invest in a variety of sectors, including various industrial and commercial enterprises, local government infrastructure projects (via LGFVs), and real estate.
As our banks team noted, 29% of trust assets are invested in higher-risk industrial or commercial sectors.
A trust is not to be confused with a “wealth management product” (WMP). WMPs are available to a broader group of individuals, with much smaller minimum investments. They are typically sold through and managed by banks or securities brokers, with or without a guarantee of the payment of interest or principal (WMPs featuring explicit guarantees are booked on banks’ balance sheets; for other non-principal guaranteed products, implicit guarantees may be assumed by some investors). Funds from WMPs may be invested in a range of products including corporate bonds, trust loans, interbank assets, securitized loans, and discounted bills—so WMPs are best thought of as a “money market fund” or pool for other financial products.
Q. How do trusts fit within the “shadow banking” sector in China?
Trust assets total some RMB 10trn as of late 2013. Though small as a share of the total stock of credit in China (Exhibit 1), trust assets have been growing at an annual rate of over 50% in recent years. The net new credit extension from trusts approached RMB 2trn in 2013 based on estimates from our bank analysts, or more than one-tenth of broad credit flow (total social financing) for the year. (Please refer to the “CCT trust product risk” note cited above for further detail on trust asset growth and composition.)
Some clients have asked about comparisons between the Chinese trusts and the SIVs (structured investment vehicles, sometimes known as “conduits”) that were prominent in the US financial crisis. The SIVs were off-balance sheet vehicles generally funded with short-term commercial paper (“asset-backed commercial paper”) with a period of a few days to a few months. Initially, these SIVs invested in relatively low risk, short-term receivables, although over time exposures shifted towards more complex, longer-term structured products such as subprime mortgage-backed securities or collateralized debt obligations. As doubts about asset quality began to arise in 2007, market funding conditions for the SIVs quickly deteriorated, requiring sponsoring banks to provide liquidity support and ultimately consolidate these assets on the balance sheet, which exacerbated funding pressures as well as asset write-downs. Similarities to Chinese trusts include the linkages with banks, the off-balance sheet nature of the trusts (true for many WMPs also), and the maturity transformation aspect (though it should be noted this is less extreme in the case of trusts, where investors are often committed for a period of a year or more, than for most SIVs; even WMPs typically have commitments of 3-12 months). Important differences include the relatively simpler assets of Chinese trusts – often loans, as in the CCT example – and the fact that the Chinese banking system is funded domestically (many SIVs raised funding across borders).
Q. Why is the potential default of a trust important?
With a large volume of trust products scheduled to mature this year, who bears the losses in the event of a default could set an important precedent. In our detailed research on the China credit outlook last year (see “The China credit conundrum: risks, paths, and implications”, July 26, 2013), we explicitly identified “removal of implicit guarantees” as one of four potential ‘risk triggers’ for a broader credit crisis. If the realization of significant losses by investors causes others to pull back from funding various forms of “shadow banking” credit, overall credit conditions could theoretically tighten sharply, with consequent damage to growth.
From the perspective of policymakers, the default of a trust under the current circumstances might be seen as having less risk of contagion than some other “shadow banking” products. First, the trust is explicitly not guaranteed by either the trust company or the distributor. Second, the investor base of a trust is typically a relatively small group of wealthy/sophisticated investors (the minimum investment in the CCT trust mentioned above was RMB 3mn). This contrasts with broadly offered wealth management products, which have many more individual investors with less investment experience and more modest personal finances. Third, the particular circumstances of this trust (lending to an overcapacity sector, failure to obtain key business licenses, arrest of the borrowing company’s owner) might make it easier for authorities to portray as a special case. Put another way, if the authorities felt obliged to provide official support to this product, it is not clear under what circumstances they would be comfortable letting any trust or wealth management product default.
Q. What are the options for policymakers?
The fundamental issue for policymakers is how any losses would be distributed among 1) investors, 2) the trust company and/or distributing bank, 3) the government and government-related entities. Potential options include:
Allowing the trust to default (investors take losses). As noted above, this would call into question the implicit guarantees perceived by some trust buyers, thereby increasing the risk that new trusts or other non-guaranteed products such as WMPs face more difficulty obtaining funds, leading to tighter overall credit conditions. On the positive side, it would encourage greater focus on the underlying credit quality and better risk pricing going forward.
Trust company and/or distributing bank provide support (levered institutions take the principal and/or interest losses), making an implicit guarantee explicit. Although legally there are no guarantees of principal from either the trust company or ICBC, to the extent the trust company manager or the distributing bank were obligated by policymakers (or other reputational or legal considerations) to provide support, it could prompt loss recognition, or at the worst a need for capital raising or shrinkage of the balance sheet if losses are substantial. As such, the quality of the underlying assets and due diligence are key to determine whether and how much losses might be taken by these institutions. Investor demand for trusts might rise after such a demonstration of support, but the higher perceived liability on the part of financial institutions would presumably reduce their appetite for issuing such products in the future.
Government-backed entity provides support (government takes losses). In this case, the short-term market reaction would presumably be relief, as refinancing risks would be reduced and both banks and trusts would be off the hook. However, moral hazard for both issuers and investors would be increased, raising the risk of credit problems further down the road. Policymakers might try to minimize this moral hazard by providing support indirectly (via some government-supported entity or third party, rather than publicly and directly) and/or by providing only partial support. An example of the former occurred last year, when an “unnamed party”, possibly the local government which provided some land collateral and guarantees to the trust loans, intervened to purchase the defaulted loans of a steel plate manufacturer, enabling the investors in a CITIC WMP to be repaid fully (see “Latest China bailout reveals risk of local government’s hidden debts”, Reuters, May 7 2013).
Some mix of these options is of course possible, if the financial institutions or government provides partial support. Most observers seem to expect at least a partial bailout of the investors, reflecting a compromise between concerns about moral hazard and concerns about contagion. Unless there is a total bailout explicitly funded by the government, credit conditions in the trust sector seem likely to tighten at least modestly. Some central government level policymakers could be open to seeing a default, as it would encourage more careful risk assessment and help to contain credit growth going forward. However, other central government and many local government policymakers might be more inclined to contain the problem. Local officials in particular may feel more pressure to support key local enterprises that are major employers and taxpayers; in the current case, officials could in theory take actions such as granting mining licenses to make the trust assets more valuable.
Q. What should investors watch to track the broader market impact?
Besides the immediate news on what approach officials take in the case of the CCT trust, investors can watch other financial metrics for signs of stress. As always, interbank rates are useful as an indicator of the marginal cost of bank funding. Spreads to yields on nonbank products may reflect their perceived risk, although they could also be affected by other factors such as tight overall liquidity conditions. While we do not have high frequency data on trust yields, WMP yields have moved higher of late. Finally, data on credit volumes will be important to watch. To the extent conditions tighten, this should become visible in monthly total social financing flows (the trust portion in particular).
Q. What is the potential impact on economic growth and markets?
The growth impact of a trust default is highly uncertain, as it represents the product of two unknowns. The first unknown is the change in overall credit extension which would result from the default, and the second unknown is the sensitivity of economic growth to new credit. In work last year on the relationship between credit and growth (“The ‘credit impulse’ to Chinese growth”, April 11, 2013), we estimated a RMB 300bn change in the average monthly credit flow would have an impact of 80bp on sequential annualized real GDP growth in the following quarter (with further, gradually fading effects in subsequent quarters if the lower credit flow persisted). This is not far from the average monthly flow of trust loans in 2013 implied by our bank analysts’ estimates. So with our assumption on credit sensitivity, a hypothetical sharp tightening in funding conditions that stifled this flow of new credit (not affecting existing trusts) would imply an 80bp hit to sequential (annualized) growth the following quarter, and roughly a 50bp hit to yoy growth over the following year. Intuitively, the modest estimated impact stems from the small size of the trust sector in the overall financial system. We emphasize the very high degree of uncertainty in these calculations—this is a back-of-the-envelope illustration rather than a forecast. On the side of a smaller effect, officials could take steps to reduce the impact on trust lending or other lending channels could pick up the slack; on the side of a bigger impact, spillovers could occur to non-trust lending or to the real economy via effects on business or consumer confidence.
In the credit markets, more willingness to allow losses should lead to greater differentiation between stronger and weaker credits. This is a theme we have emphasized for some time, including in our in-depth work on the China credit outlook last summer.
A policy/credit tightening bias may put pressure on China equities in the near-term, particularly credit-dependent, investment-heavy cyclical sectors. Investors are unlikely to reward either option 1 or option 2 above, as the default option may trigger contagion and risks to growth (thus earnings as well) and the “bailout by financial institutions” option is structurally unappealing (thus risks valuation). Option 3 is probably the only outcome that would support a slight market rebound near-term, in our view, as immediate contagion is averted and listed financial conditions are protected from bearing losses—though at the cost of longer-term moral hazard.
Thanks for this, its really helpful.
The latest reports suggest ICBC would be willing to account for 25% of the WMP. Also, I am amazed how Goldman in this report predicted the chinese gov would grant licenses to the coal company to increase the value of its assets.
The most recent reports say 3 licenses have been issued. pretty accurate
Jiang Tells CNBC That ICBC Won’t Compensate Trust Investors
Quote:The incident will be a lesson for investors on moral hazard and risks associated with such investments, Jiang told CNBC from the World Economic Forum in Davos, Switzerland. The Beijing-based lender won’t take “rigid responsibility” for the losses and will review all its partnerships in entities with which it does business, Jiang said, according to CNBC.
...
Bank customers need to “see clearly” the risks associated with wealth-management products and other such investments, Jiang told CNBC. ICBC was a distributor of Credit Equals Gold No. 1 and didn’t offer “ironclad guarantees,” Jiang said, according to the report.
http://www.bloomberg.com/news/2014-01-24...ports.html
UPDATE 1-China's ICBC says will help repay investors in troubled shadow-banking scheme
Quote:* ICBC says bank will take some responsibility - paper
* ICBC will inform investors of decision by Jan. 28
* ICBC official says concerned about reputation
* Bailout will reinforce implicit guarantee assumption
Conflicting statements. I think the message is, the investors must be taught a lesson, but "some" compensation will be made due to message of risk not delivered clearly during the marketing of such products in 2009.
I think its more likely that ICBC is strong-armed by the authorities to making some restitution.
The chinese authorities are more concerned about preventing bank runs and sudden volatility than anything else
(24-01-2014, 02:48 PM)GFG Wrote: [ -> ]I think its more likely that ICBC is strong-armed by the authorities to making some restitution.
The chinese authorities are more concerned about preventing bank runs and sudden volatility than anything else
Just realized the entire 3Billion RMB product is less than 1% of ICBC last full yr profits
And it's unlikely icbc will have to take 100% responsibility
So the fear is systemic, rather than specifically due to this WMP
The trust is collateralized on the equity of the company. I guess that there must be some other senior debt obligations before the trust. If I make a wild guess, ICBC is the senior debt obligation holder.
The shadow banking system in China is mainly to help the banks transfer some of their credit risk out of their balance sheet. Every bank knows that credit risk is their biggest risk. The banks are not stupid. There are pressure for them to continue to lend. So they find some investors taking the junior debt/equity in front of them.
(20-01-2014, 02:30 PM)grubb Wrote: [ -> ] (20-01-2014, 01:28 PM)freedom Wrote: [ -> ]This is not the beginning of 21st century any more.
As recently reported, the big 4 banks alone earn more than the rest of all private enterprises listed in China stock market.
So the profitable SOEs can't cover the small number of loss-making enterprise?
There is no reason for the SOEs to pay market rate. Do you expect Temasek to pay the same interest rate as some nobody SMEs?
One hallmark of the growth model is through financial repression, through which wealth is transferred from the household sector to the state. In China the central bank has set caps on the deposit rates above which the banks cannot pay, and floors below which banks cannot lend. In fact, including inflation depositors are getting negative interest rates. It is no wonder that banks are making as much as profits as they are.
http://www.knowledgeatwharton.com.cn/ind...nguageid=1
This period of fat spreads for banks is now ending. Do a simple google search and you will see that the central bank is moving to liberalize interest rates.
Even if you assume that SOEs do not get preferential rates below the benchmark rate, the interest rate is still ridiculously low for a country growing at double digits in the past (and now at 7.7%).
Financial repression (along with cheap land, tax breaks etc) also means that outsized SOEs profits are subsidies from the household to the state. Although household income has increased significantly, consumption as part of GDP has fallen to only 30%+.
If China is to rebalance towards a consumption driven economy, SOEs must take the hit. Rebalancing is essential because the end of the growth model is typically characterized by runaway credit and value destroying investment (think Japan, Brazil). Saying that SOEs should enjoy preferential rates is like saying households should continue subsidize the state sector. A rebalancing will never occur in that case.
SOEs enjoy preferential borrowing rate because they have the assets to be collateralized upon. Unlike millions of SMEs which has little equity, SOEs have a much larger equity/asset base. Maybe SMEs have better ROE partly because there isn't much E. Seriously, how much would you charge a company with little asset and equity for a loan? The same rate as a secured loan?
Plus, SOEs are not borrowing big sum from bank debt. The borrowing rate is too high for them. They have alternative means to issue debt at significantly lower rate than banking debt but unsecured with anything.
You can criticize the way PBOC set the ceiling of deposit rate and the floor of lending rate. But the spread is as much as market determined. The creditworthiness of the company determines the borrowing rate. If the company is good enough, they can well tap the bond market within China or abroad. Just look at the SOEs, many tapped the oversea debt market for much cheaper lending rate.