Rubber Meets Road: Liaoning Bank to IPO in Hong Kong

A little over a year ago, I posted Liaoning Sounds Warning on Chinese Economy. The impetus was seeing real estate investment and industrial production turn negative. A year later, Liaoning is still at the epicenter of China's industrial slowdown. In October, Industrial Production Collapsed 13.3% in Liaoning. Home prices in Jinzhou fell in October and are down 5.8% from last year. Dalian and Shenyang also have seen home prices decline as the entire province's economy slows.

Clearly, things are not going well in Liaoning, but a bank in Jinzhou city is about to IPO.

Over at FT Alphaville, Andrew Collier of Orient Capital Research asks: Could China suffer a banking crisis?
Could a banking crisis erupt in China? The commonly accepted answer among western analysts is no, for the simple reason that China has huge State owned banks that dominate the country’s banking industry. But dig a little deeper and a different picture emerges.

It turns out that within China’s smaller cities, the market share of the big banks fades away. Instead, local banks take over.

...In the city of Jinzhou, population 810,000, the state bank share drops by more than half to 19.4 per cent. Most of the slack is taken up by just one bank, the Bank of Jinzhou, with 62.6 per cent of assets.

Global Capital: Chinese city banks pounce on last window for HK IPOs
Bank of Qingdao Co plans to launch its $600m listing on November 20 via joint sponsors Citic CLSA Securities and Goldman Sachs, alongside a syndicate of some 10 banks, according to sources close to the company. Pre-marketing kicked off earlier in the week.

It is not the only one seeking fresh equity. Bank of Jinzhou Co commenced investor education on November 17 for its $600m float, while Bank of Zhengzhou, which is yet to gain approval from the Hong Kong Stock Exchange, is eyeing a $700 IPO before the year is out. Meanwhile, Bank of Tianjin is seeking a float next year.
A loan to Hanergy kept the firm's listing delayed: Hanergy wait over for Jinzhou in IPO
The commercial bank, based in northeastern Liaoning province, missed its original listing plan in June, as authorities questioned an eight billion yuan (HK$9.72 billion) credit line it granted to the parent of scandal-hit solar firm Hanergy Thin Film Power (0566).

The bank will kick off a roadshow next Wednesday and debut December 7.
The company's application proof is here: Application Proof, PHIP and Related Materials, Bank of Jinzhou Co., Ltd.

My curiosity got the better of me when I saw the bank is growing 50%+ yoy. I want to see how the bank increased assets to over 300 billion yuan with only 90 billion in loans. What are these assets? They're listed as debt securities classified as receivables. A look at the notes: wealth management products. The bank, as of June 30, had 90 billion lent out in normal banking and 125 billion lent out through shadow banking. Also from the notes: the average yield on their assets rose from 6.04% in the six months ended June 2014 to 7.80% in the six months ended June 2015.

These WMPs and whatever else is lumped in here, have been driving profits. "Interest income from investment securities and other financial assets" constituted 19.5%, 27.4% and 42.6% of interest income in 2012, 2013 and 2014. Note that they're investing in these products, in addition to offering them. Page 28 lists risk factors associated with these products. As of June 30, 2015, these assets were almost 70% of total assets.

A basic picture of another type of shadow banking works, beneficial interest transfer plans:
The credit guarantee makes an appearance. As of June 30, 2015, 45.9% of assets in BITP were backed by credit guarantees.

I wonder how the market will price this.


  1. Regarding the explosion in assets without associated increase in liabilities, did they do a gigantic capital raise to get so much equity? Or are they issuing credit to themselves to "invest" in WMP and fraudulently saying its equity?

  2. Also why is so much redacted from that document? Is that normal?

    Sounds like just another standard Chinese scam.