So far in 2018, 1.9 Trillion Yuan sunk into china bail-outs.

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High debt to GDP, a slowing economy and the unfolding of a seemingly protracted trade war with the US has caused the Chinese Central Government to roll out yet another bank bail-out.

On the weekend, China announced it would inject a further 750 Billion yuan into its economy (call it, ~US$109 billion) via a 1% relaxation of the reserve requirement ratio for Banks.

This follows prior moves this year, when the Central Government owned People's Bank of China, i.e., the Central Bank:

  • lent 502 Billion yuan to financial institutions via its one year lending facility (~US$72 Billion) to stimulate lending to small businesses; and

  • made a 700 Billion yuan commitment to bail out troubled banks (~US$103 Billion).

So far this year that makes 1.95 Trillion Yuan, or US$290 billion in lending stimulus and Bank bail-outs.

Importantly, the 502 Billion yuan bail-out came with a price. The price was in the form of a debt for equity swap. In other words, the Central Bank will now own a greater share of the major Chinese Banks, including the largest state-owned banks plus the large joint-stock commercial lenders.

As I wrote in July, this is eerily similar to what happened in the US on the eve of the GFC, and when:

  • the US Treasury took US$234 Billion (in today's dollars) of taxpayer funds to bail-out of the major US mortgage corporations, Fannie Mae and Freddie Mac, in exchange for 10% preference shares, plus (almost) free warrants over just under 80% of the common share capital; and

  • some time later, the US Federal Reserve bailed out the insurer, AIG for US$85 billion, also using a debt for ‘80% of your equity’ swap.

With slowing in the Chinese economy and debt to GDP already a mind boggling 280% to 300%, the latest Bank bail-out will further kick the country’s de-leveraging can down the silk road.

This looks like a Fannie and Freddie bail-out to me, but with bigger numbers involved, and it will probably not be the Central Government’s last intervention because the Party will probably consider bail-outs to be part of its ‘social contract’.

Mike


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