Banking Regulator Tells Banks: Do A Good Job, Extend and Pretend

China's banking regulator (CBRC) has put our the message: banks should "do a good job" and help companies through tough times. Banks shouldn't cut off lending or call in loans. The word used is translated by Google as "free," but it can more accurately be translated as "as you wish" and the way CBRC is using it, it's "willy nilly." The bank regulator is telling banks they can't behave as normal banks would and protect their capital.

Yesterday (August 3), "Daily News" exclusively learned that CBRC issued a "do a good job on bank creditors committee financial institutions notice" on or before (hereinafter referred to as "Notice"). Among them, Article XIII explicitly noted that the creditor banking institutions should be concerted action, "cannot stop lending, call loans as you wish", and then through refinancing, extension and continued lending, and other ways "to help companies overcome their predicament."
Wallst.cn: 银监会规范银行“债委会”:不得随意停贷抽贷

This call to extend and pretend, and to do what it takes to keep companies afloat reminds me of the Xiaoshan order back in 2014: Rumored Mass Death of Companies in Xiaoshan District of Hangzhou If Banks Collect on Debts; Government Tells Banks to Sit Tight or Leave

Banks will get the message: don't be the "bad guy" who acts in his self interest and calls in the loans to bankrupt companies. Of course this won't stop bankruptcies except in the formal sense, the destruction of capital will take place anyway, and banks will require a big bailout. Although not as explicit as the Xiaoshan order to sit tight or get lost, no doubt the unspoken message is being received: if you are a bad actor, you might face regulatory scrutiny, be one of the chickens used to educate the monkeys (as Bear Stearns and Lehman were), or end up on the losing side of a forced consolidation.

From the macro view, all this does is make the eventual adjustment even larger, and guarantees that when the final bill come due, it's very likely to be paid by the renminbi.

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