Analysis: China eyes private funds to tackle bad-debt buildup, avoid bailout

Sun Sep 15, 2013 5:24pm EDT
 
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By Gabriel Wildau

SHANGHAI/BEIJING (Reuters) - Faced with a chorus of warnings that China risks choking on bad debts, Beijing is pushing banks to raise private capital in an effort to head off the need for a second government bailout in as many decades.

The hangover from a credit binge that powered China's swift recovery from the global financial crisis, combined with the economy's slowdown, has prompted expectations of a repeat of the early 2000s, when Beijing shored up its major banks with hundreds of billions of dollars.

Right now, however, authorities appear focused on pushing banks to bolster their balance sheets by aggressively enforcing new international bank capital requirements, known as Basel III.

Some analysts say warnings of an impending crisis are overdone.

"We've done some stress test analyses, which find that even under fairly stressed scenarios, the banks - especially the larger banks - will still be making a marginal profit," said Grace Wu, head China bank analyst at Daiwa Capital Markets in Hong Kong. "So in that sense, they won't even eat into their reserves."

Twelve of China's 17 listed banks have already announced plans to raise around 425 billion yuan ($69.47 billion), largely through subordinate debt.

On Friday, the securities regulator said banks - and other listed firms - could also issue non-tradeable preferred shares. That offers another avenue for banks to bolster their balance sheets with funding from commercial investors, and possibly a way for the government to inject capital directly if private funds aren't enough.

In an article published last week, China's central bank governor, Zhou Xiaochuan, cited the U.S. government's rescue in the global financial crisis of American International Group Inc as a positive example of how preferred shares could be used.   Continued...

 
The headquarters of China's central bank, the People's Bank of China, is pictured behind an iron chain in Beijing, June 21, 2013. REUTERS/Jason Lee