Domino #2: Chinese Bank With $105 BN In Assets On Verge Of Collapse | China's Lehman

Chinese banking teetering on the precipice Of collapse?

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Domino #2: Chinese Bank With $105 BN In Assets On Verge Of Collapse

Sun, 06/02/2019 - 22:03
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While the western world (and much of the eastern) has been preoccupied with predicting the consequences of Trump's accelerating global trade/tech war, Beijing has had its hands full with avoiding a bank run in the aftermath of Baoshang Bank's failure, scrambling to inject massive amounts of liquidity last week in the form of a 250 billion yuan net open market operation to thaw the interbank market which was on the verge of freezing, and sent overnight funding rates spiking and bond yields and NCD rates higher.
Unfortunately for the PBOC, Beijing is now racing against time to prevent a widespread panic after it opened the Pandora's box when it seized Baoshang Bank two weeks ago, the first official bank failure in a odd replay of what happened with Bear Stearns back in 2008, when JPMorgan was gifted the historic bank for pennies on the dollar.
And with domino #1 down, the question turns to who is next, and will they be China's Lehman.
This was the question we asked last Thursday, when we published a list of regional banks that have delayed publishing 2018 reports, the biggest red flag suggesting an upcoming bank solvency "event."

https://zh-prod-1cc738ca-7d3b-4a72-b...20troubled.jpg One day later we may have gotten our answer, when the Bank of Jinzhou, a city commercial bank in Liaoning Province, the second name in the list above, and with some $105 billion in assets, notably bigger than Baoshang, announced that its auditors Ernst & Young Hua Ming LLP and Ernst & Young had resigned, not long after the bank announced it would delay the publication of its annual reports.
For those confused, the delay of an annual report and the resignation of an auditor, means a bank failure is not only virtually certain but practically imminent.
As the bank - which first got in hot water in 2015 over its exposure to the scandal-ridden Hanergy Group - writes in a filing on the Hong Kong Stock Exchange, E&Y was first appointed as the auditors of the Bank at the last annual general meeting of the Bank held on 29 May 2018 to hold office until the conclusion of the next annual general meeting of the Bank. That never happened, because on 31 May 2019, out of the blue, the board and its audit committee received a letter from EY tendering their resignations as the auditors of the Bank with immediate effect.
The reason for the resignation: the bank refused to provide E&Y with documents to confirm the bank's clients were able to service loans, amid indications that the use of proceeds of certain loans granted by the Bank to its institutional customers were not consistent with the purpose stated in their loan documents.
As a result, "after numerous discussions and as at the date of this announcement, no consensus was reached between the Bank and EY on the Outstanding Matters and the proposed timetable for the completion of audit." As a result, after a clear breakdown in relations with its own auditor, the Board decided to appoint Crowe (HK) CPA Limited as the new auditors of the Bank to fill the casual vacancy following the Resignation and to hold the office until the conclusion of the 2018 annual general meeting of the Bank (we are taking the under with lots of leverage as Crowe will likewise quit in the coming weeks if not days).
And confirming that not even the bank's management believes this "justification" will be enough to avoid a rout in the stock, the bank reported that it has requested the trading in the H shares (which was frozen on April 1) on The Stock Exchange of Hong Kong Limited to be suspended until the publication of the 2018 Annual Results. For anyone who hopes that these shares will ever be unfrozen for trading, there are a few bridges in Brooklyn that are for sale.
The real question facing Beijing now is how quickly will Bank of Jinzhou collapse, how will Beijing and the PBOC react, and what whether the other banks on the list above now suffer a raging bank run, on which will certainly not be confined just to China's small and medium banks.
Source: Bloomberg/HKex.


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Blain: "The Question Is Who Replaces China As New Supply Chains Emerge"


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Mexico would have been one of my picks – but Trump is now going for the jugular. India? Not a chance – too much inequality and bureaucracy Brazil? Forget it. South-East Asia? I suspect Vietnam has higher ambitions.

Mon, 06/03/2019 - 08:42
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Blain's Morning Porridge submitted by Bill Blain

“Hang on, I’ve got an idea...”

June is bursting out all over, but we’ve still got 5 more days of May.

An exciting week in prospect – Trump in the UK, Xi in Russia, the US Employment Report on Friday. The ECB on Thursday. I would advise avoiding central London for the next few days – its likely to be full of demonstrators. I will publish the best original photos from Readers of the Trump Baby balloon… not because I think it’s particularly smart to be insulting our greatest trade partner, (perhaps our only trade partner if Brexit pans out as badly as it might), but because it’s kinda funny, and we need something to cheer us up.
I was going to scribble something about how Trump’s latest twitterstorm targeting Mexico highlights the risks to any and all emerging market economies, but he’s also taken India off the developing nations list, hinting they are also in his book of names to be “sorted”. Is it just random? Or is it part of some grand plan?
I met with a very senior UK/Australian strategist/economist on Friday, and over a very pleasant bottle of Lady Petrol we got talking about EM. While we both agree smart EM is good way to achieve non-correlated returns, we concluded the last 30 years of thematic EM investment based in BRICS was probably a nonsense – full credit to Jim O’Neill for coming up with the moniker, but they are such different and challenging economies it never made much sense to treat them as a unit. Each EM nation faces its own set of challenges – which often boil down to governance and law.
There is a massive opportunity out there. Which nations benefit from the New Cold War? Which countries replace China as new global supply chains develop and form? That’s a fascinating EM theme.
Mexico would have been one of my picks – but Trump is now going for the jugular. India? Not a chance – too much inequality, bureaucracy and too difficult to try to find partners. Brazil? Forget it. South-East Asia? I suspect Vietnam has higher ambitions. North Korea is tipped, but when ESG is now an investment requirement, who is going to buy goods built in Slave Labour conditions? Mention Africa and there is much shaking of heads and sharp dismissal - I suspect it’s too easy an option to simply write off Africa; we might be missing a great opportunity for affirmative capitalism to improve lives if we can see past the endemic corruption.
While it’s easy to talk about China being replaced – the who-by is a more difficult and nuanced call. Maybe, as more than one wag as suggested, China replaces China?
Or what about a new industrial revolution? Maybe the right investment theme is to identify opportunities in developed nations with the ambition to replace China directly through the innovation of new tech such as 3D printing, automation and robotics? Who has these abilities – which boil down to which economies have the engineering supply chains to provide the graduates to staff and run new manufacturing plant? Robotics is not going to replace us, but we do have to upskill. Sadly education in the Anglo-Saxon Occident is failing to produce the skills in the quantities required – time for a rethink on education I think.
Back in Yoorp, the ECB meet on Thursday, and although there is talk about revision to higher European growth, it won’t change the lower into infinity choices facing the bank. Speculation about who succeeds Draghi remains rife, but it feels there is a concerted spin effort underway to recast arch-sceptic and Bundesbank chief Jens Weidmann as a born again Europhile.. which further hints at backroom deals being done in Brussels on the other European top jobs. I suspect this leads to a very unhappy parliament if a cabal of leaders have already carved up the top jobs… but hey-ho!
In Markets, Bond yields are still falling and stocks are looking well wobbly.
Is the inverse yielding treasury curve really predicting a recession? Or is it dollar strength, a flight to quality, and the expectation the US is the most likely winner of the New Cold War that’s fuelled the rally in Bonds? Lots of analysis says a recession is on the way – fuelled by the current noise on trade war. That doesn’t seem to be a major issue for lots of investors who remain wedded to the belief low interest rates = strong stock prices… which is a curious notion.. Low interest rates suggest an economy in trouble, requiring support and nurture… not one that supports optimistic stock valuations..
The bottom line is who is going to pay my pension if bond yields are the square root of nothing? How I am going to live off dividends if I’m invested in a stack of tech stocks that will never ever make a profit, or across an economy when 10-years of zero interest rates means corporates are overleveraged, having converted their equity into debt to fuel buybacks?
Time to go back to basics and figure out what is wrong with this programme. Financial assets (listed stocks and bonds) remain profoundly distorted – which isn’t a reason not to trade them in the short-term, but long term you have to be asking some pretty serious questions.
I’m going to stick with non-correlated alternatives for the time being. There are certainly risks – not least in terms of liquidity, but if you can buy US$ bonds liked to performing assets that give an 8% return plus additional upside at maturity, then what’s not to like? Happy to explain!
Meanwhile…
Later this week we have the 75th anniversary of D-Day. I was hoping to attend some of the events in my home village of Hamble. It was the setting off point for part of the invasion fleet, but we have a pretty packed schedule of business.
There is no shortage of D-Day heros, but three personal stories are worth sharing:
The legendary D-Day piper, Bill Millan, set off from Hamble quay. A few years ago She-Who-Is-Now-Mrs-Blain and I were delighted to sponsor a March of 100 Pipers in his honour through the village and met his son – who is a pretty mean piper himself. (I am a very bad piper.) Millan was apparently the only man to wear his kilt during the invasion, and the vision of him charging up the beach playing Highland Laddie with the Commandos must have been a stand out moment. There is a story the Germans didn’t shoot at him because they simply assumed he was mad! There is now a statue of Piper Bill on Sword Beach.
Or there is my sailing chum Elis, who as an ensign in the merchant marine wasn’t bound by the same age restrictions as the military forces – he may have been the youngest man in the invasion force. Or our neighbour Ted - as a young lad growing up in the village during the war, he told me how he spent the months before the invasion skipping school to deliver water to the invasion craft moored on our river. Every day he piloted his water barge up and down the river, until one morning they’d all gone.
On that note, back to the day job!



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T-Day: US-China Trade War Is An Echo Of What Happened Between The US And Japan In The 1940s


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Today begins a week pregnant with historical memories of events that are uncomfortably close to our own in some worrying respects, even if we seem to be getting our memories all wrong as we get older.

Redemptions blocked by hedge fund!

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It Begins: Multi Billion Hedge Fund Blocks Redemptions
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