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Guest post: can China bail itself out? (Quite possibly, no)
The real question is – can China use its capital in a time of crisis? If China suffers a financial meltdown can the government pay? Could China handle the so-called Minsky Moment when asset values collapse following a speculative bubble, a term coined by PIMCO’s Paul McCulley about the 1998 Russian Financial Crisis?
On the asset side, clearly the easiest source of usable capital is China’s $3.8tn of foreign reserves. However, pulling them out of western markets (mainly Europe and the U.S.) would send a strong negative signal and cause a decline in their value. Plus, importing foreign exchange would require massive sterilization by the People’s Bank of China (PBoC) – a process dubbed “mopping up” – by selling bonds and thus avoiding an inflationary spiral. So the reserves are a doubtful source of easy money.
The next potential pool is China’s Rmb 70tn in state assets. Many Chinese point to their bloated state firms as a source of ready capital. Why not sell them off? It worked for the four state banks when they went public in the earlier part of the last decade when China set up four asset management companies to dispose of non-performing loans.
Easier said than done.
This article is contrarian in the opposite direction. 16家上市银行涉房固定资产“失真”：至少万亿元未入账 makes the case that Chinese banks have trillions of yuan in capital on their balance sheets because their real estate is valued at cost, not the current market price. The main point in the article is that it can be cheaper to buy real estate via the stock market. That dents the bearish position on the banks, but unlocking that value amidst a serious decline in the real estate market would be a problem; it might not help at the moment they need capital the most. After a crisis, the banks would likely own even more real estate than they do now. Still, it's always better to have more assets than fewer.
According to the "Securities Daily" reporters exclusive statistics, as of the end of the first quarter of this year, involving housing owned listed banks net fixed assets of about 492.4 billion yuan, this year is likely to exceed 500 billion yuan. Even under the most conservative estimates, the market value of these assets will reach 1.4 trillion yuan, compared with the current net "surplus" of nearly 1 trillion yuan; If the valuation then be bold enough to hide the off-balance sheet asset value could be in the trillions.
