Every Time a Bell Rings, A Chinese Bank Goes Bust

ZH: China Quietly Bails Out Another Bank With 620 Billion Yuan In Assets

Harbin Bank, which is one of the biggest banks in China’s northeast with 622 billion yuan in assets as of June 30, 2019, and trades on Hong Kong’s stock exchange, becomes the fifth bank - after Baoshang Bank , Bank of Jinzhou, Heng Feng Bank, and Henan Yichuan Rural Commercial Bank - to be bailed out by the state, and will be 48%-controlled by two government entities after six private shareholders shed their stakes, according to a bank statement issued late on Friday.

Total consideration for the shares involved came to almost 15 billion yuan, or around $2.1 billion, the bank said, though it described the transactions as transfers rather than stock sales, which is to be expected if the bank was being bailed out instead of actually selling a viable stake.

As has been the customary case, the bank didn’t provide any reason for the transactions in the statement, and Chinese bank regulators made no comment on the action.

And, as was the case with at least one previous bank "rescue", Harbin Bank was connected to a former oligarch who disappeared not that long ago amid allegations of massive fraud. Indeed, as the WSJ reports, the bank is among a handful of financial businesses in China linked to once-powerful tycoon named Xiao Jianhua who in early 2017 disappeared amid a wave of prosecutions of big private investors. Businesses owned by some of those people, including Wu Xiaohui’s Anbang Insurance Group Co., have also since become government-owned.

What separates bulls from bears is fraud and how far it reaches into the economy.

Harbin Bank is also politically connected. From three years ago SCMP: Harbin Bank leads US$1.5 billion syndicated loan to Russian state bank, offering lifeline amid EU sanctions

WSJ: Why China’s Smaller Banks Are Wobbling

As I laid out in Pivot Time: Another Bank Run, This Time in Troubled Liaoning, I laid out a very brief and simplistic explanation of China's past decade of growth. Commodities fueled by China-related infrastructure development peaked in 2011. China then relies heavily on real estate, which in some areas peaks in 2014. Then banking took over and some banks, like the Bank of Jinzhou bailed out earlier this year, grew assets rapidly by making interbank loans. To boil it down even more simply, at first credit was force fed into infrastructure, then it funneled into real estate (and briefly into A-share stocks from mid-2014 into mid-2015), and then finally into the banks themselves. Credit is losing its efficacy, the marginal return on debt is falling, and now it takes rapid credit growth merely to prevent a collapse. Which is why I'd get very concerned if total credit growth slipped below 10 percent.

In the near term, markets reacted positively to China signaling the concerns are warranted.

CNBC: China cuts short-term funding rate for first time since 2015

You can go broke betting against the market because you can run out of money before the market does. The market is a weighing machine in the long-term, not in the short-term. Traders play poker. Markets bounced today because they have a Pavlovian response to central bank actions and the history of Chinese success in this area. There were bounces after downturns in 2008, 2011, 2014 and now in 2018. However, unlike the previous times, there's no major stimulus effort yet. Moreover, even if they try, history suggests the outcome will be even lower commodity prices, a higher USDCNY, a larger pile of bad debt and higher risk that stability is lost.

In not entirely unrelated news, China Battles Wave of Online Criminal Activity

The case was revealed by the Ministry of Public Security (MPS) during a briefing last week to highlight criminal activity on the internet that’s become so pervasive it prompted the authorities to start a special campaign in January called “Internet Cleanup 2019.” Part of the offensive involves cracking down on entities that infringe on citizens’ privacy through the acquisition of personal information and data. As of the end of October, the police have investigated almost 46,000 cases of internet crimes and arrested nearly 66,000 suspects for offenses including computer hacking, internet fraud, online gambling and cybersex, the MPS said.

One key focus of the campaign is a practice known as predatory lending, where unscrupulous money lenders use various means to deceive or coerce borrowers to take out loans they don’t need or can’t afford and that carry unfair or abusive terms. To find customers and control lending risks, the online lenders leverage data that’s been collected illegally and pay for support services from companies that provide technology, data and payment solutions.