Monday, January 20, 2020
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Can the next big balloon durr in the Chinese banking system?

Big banks are no longer able to lend and lose their depositors’ money – we would think. There is a big bank that gives a lot of credit and makes a nice profit, but this bank is not in the US, not even in Europe. Search in China.

Increase in profit

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According to a report released today by the Good Finance of China, the first half of the year saw a 31% increase in profit, with higher loan-to-value ratios and rising interest rates (China has raised its central bank base rate three times this year).
Net sales for the first half of this year was 92.8 billion yuan, compared with 70.7 billion yuan last year.

Not a regular commercial bank

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The Good Finance of Construction is not a regular commercial bank. It was founded in 1954 to finance the construction of roads, bridges, dams and public buildings. Although its shares are listed on the Hong Kong Stock Exchange, the bank operates as a government agency with centrally regulated interest rate policy and government voting rights. The bank promotes the principles of public welfare, contrary to the commercial principle most widely accepted by commercial banks around the world, protecting the profits of depositors and shareholders.

Look at alternative market financing options

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Chinese bank officials lack the freedom to make decisions in business, experience and financial esteem – so it is not in their best interest to look at alternative market financing options. Their job routine (which seems straightforward to the Europeans) consists of collecting deposits and financing state-approved real estate projects and public limited liability companies, rather than lending them in real-world risk terms.

Deposit a percentage of their salaries

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Public financing of banks may be a possible reason for another balloon. Banks manage Chinese taxpayers’ money and deposits, and often employees have to deposit a percentage of their salaries with state banks.

This means that in the future, real estate projects that fail, and companies that become insolvent, are funded from taxpayers ‘and depositors’ money. In addition, the Treasury of China can independently decide to assist banks without any prior authorization process, similar to the US. For the time being, however, Chinese investors have confidence in the profitability of their banks and the Chinese economy.

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