Ho Jinx: Temasick Not Affected by China Banks' Meltdown Woh. Think SGs are Daft?

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Temasek: China’s credit crunch ‘will not affect’ its substantial stakes in Chinese banks

July 5th, 2013 | Author: Editorial

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t month, China’s central bank, the People’s Bank of China (PBOC), decided to tighten liquidity in the market in its bid to limit funds to a vast informal loan market (“shadow finance”) as it works to shore up growth in the world’s second-largest economy.

As a result, some Chinese banks found it difficult to borrow the money they required from their fellow banks. The interest rate for an overnight loan from one bank to another briefly hit 30% on 20 June, compared with a typical rate of about 2.5% earlier in the year. The cash crunch raised fears of bank defaults.

Typically, when China’s banks run short of cash, the central bank will step in to help by “printing” more money. However, last month, PBOC surprised everyone by refusing to help, causing a temporary cash crunch in the system. As interest rates spiked, fear and uncertainty set in. Eventually the central bank did intervene, ordering big banks to lend to smaller ones and promising to stabilise the market. But everyone was shaken by the event.

The indirect consequences are profound. The central bank’s move shows that China’s leadership is worried about rapid credit growth. This excess lending is contributing little to the economy. Instead of financing consumer spending or business expansion it appears to be financing the purchase of existing assets instead. That adds nothing to growth. The government’s efforts to curb lending could, however, slow China’s growth further.
The move also shows how concerned the Chinese government has become about the surge of “shadow finance” in China, a term encompassing all kinds of credit created outside formal bank-lending channels, including loans arranged by banks but not recorded in their balance sheets. The informal credit boom has led to concerns about a potential increase in bad debt in the country’s vast banking sector, adding to worries over Beijing’s long-touted ability to manage its overall economy.

Estimates by UBS put the size of China’s so-called shadow banking system at US$3.4 trillion, equal to 45% of China’s GDP. Just in Wenzhou alone, a city in Zhejiang province, it is estimated that almost 90% of families and 60% of companies participate in the informal market for loans, according to a 2011 survey by PBOC.

The rapid rate of credit growth is viewed by many analysts as stunning and unsustainable. The concern is that much of that money will have been lent without due care to businesses and individuals, and many of them will never be able to repay much of it. There is every danger that banks and financial institutions can and will go bust – unless they are bailed out by central bank and government.

In any case, Temasek Holdings isn’t very concerned. It has been investing in Chinese banks big time.

China is a key investment market for Temasek, accounting for 23% of its portfolio or S$198 billion as of 31 March 2013. Temasek raised its exposure to the Chinese financial industry in the past fiscal year by buying up shares in Industrial and Commercial Bank of China Ltd, of which it now owns 8.07%. Temasek has pumped into China an estimated S$3 billion since 2012 alone.

China Construction Bank is Temasek’s second-largest investment, at 8% of its portfolio or S$18.1 billion as of 31 March 2013.

At a briefing yesterday (4 Jul), Temasek said that China’s credit crunch “will not affect” its substantial bank stakes there.

Mr Chia Song Hwee, Temasek’s co-head of China, said, “There is sufficient liquidity in the system, so we are not concerned about a liquidity crunch over a prolonged period.”

“The banks that we have invested in are actually very well capitalised.”

Despite China’s slowing economic growth and risks in its financial sector, “the government has ample policy room to deal with these challenges,” he said.

Temasek was burned by its financial industry exposure in 2008 as stakes in large European and U.S. banks plunged in value due to turmoil in global markets. But it has kept 31% of its investment portfolio in banks which it feels are strong and can capture emerging market growth, trimming from nearly 40% before the financial crisis in 2008.

Temasek’s net profit for the fiscal year ending 31 March 2013 declined very slightly to S$10.6 billion from S$10.7 billion in the preceding year.

Related: Time to worry about Temasek’s strategy on Chinese banks


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