Commentary on Political Economy

Tuesday 23 April 2019

Chinese Rats Run Out Of Hard Currency

WE TOLD YOU SO! CHINESE RATS RUNNING OUT OF HARD CURRENCY! No wonder Xi’s step is unsteady! This report just in from the Wall Street Journal.

MismatchChina's banks now owe more greenbacks than they're owedDollar-denominated assets less liabilitiesSource: Company reportsNote: Converted from Chinese yuan at a $1 = 6.69 yuan rate
.billionChinaConstructionBankIndustrial andCommercial Bankof ChinaBank of ChinaAgricultural Bankof China2009’10’11’12’13’14’15’16’17’18-100-75-50-250255075100125$150
China’s major commercial banks have a funding issue outside Beijing’s control: They’re running low on the U.S. dollars they need for activities both at home and abroad.
The combined dollar liabilities at the big four commercial banks exceeded their dollar assets at the end of 2018, their annual results show—a sharp reversal from just a few years ago. Back in 2013, the four together had around $125 billion more dollar assets than liabilities, but now they owe more dollars to creditors and customers than are owed to them.
Bank of China BACHY -0.33% is by far the greatest contributor to the shift. Once the holder of more net assets in dollars than any other Chinese lender, it ended 2018 owing about $70 billion more in dollar liabilities than it booked in dollar assets. The other three lenders actually finished the year with more dollar assets than liabilities, though Industrial & Commercial Bank of China IDCBY -0.23% had a deficit at the end of 2017.
In its annual report, Bank of China says that its asset-liability imbalance is more than addressed by dollar funding that doesn’t sit on its balance sheet. Instruments like currency swaps and forwards are accounted for elsewhere.
But such off-balance-sheet lending can be flighty. As the Bank for International Settlements notes, the vast majority of currency derivatives mature in under one year, meaning they are up for constant renewal and could evaporate during times of pressure.
Yuan, they’ve got. PHOTO: JON WOO/REUTERS
Central-bank currency swaps, meant to protect banks from liquidity crises when they lend in currencies other than their own, have boomed around the world in recent years. China has been particularly active in garnering swap agreements, but still doesn’t have the most crucial of all, with the Federal Reserve.
The imbalance at Bank of China is small relative to its balance sheet, so it shouldn’t be seen as an imminent threat. The government’s $3.1 trillion in foreign exchange reserves are probably also a backstop in a crunch, but it’s unclear how bad things would have to get before Beijing would permit its use by major commercial banks. A heightened need to help the big four lenders also makes that hoard of reserves seem somewhat less formidable.
It isn’t just that the country’s banks are lending dollars overseas, though it doesn’t help that Belt-and-Road projects are overwhelmingly financed in the U.S. currency. Chinese property developers have a rapacious demand, too.
The root of the problem is simple: Beijing would like to be a major financial player overseas, but few borrowers have any interest in the yuan. Most international trade is accounted for in dollars, the yuan is difficult to convert and foreign owners of Chinese assets have at best an uncertain relationship with the country’s legal system.
Investors should keep an eye out for stresses in dollar funding markets. Bank of China may be feeling the squeeze.

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