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The Chinese Ponzi Continues: Property Developers Buy (Piggy) Banks

Tyler Durden's picture




 

"Whatever it takes," appears to have become the new mantra across global financial systems and with Chinese shadow banks under increasing pressure (as cash-for-commodity deal financing dries up and "hedge" losses mount on 'surprise' Yuan weakness), property developers are increasingly desperate for liquidity. The solution, as The FT reports, Chinese property companies are buying stakes in banks and raising fears that the country’s already stretched developers are trying to cosy up to their lenders. 10 Chinese developers, who have been active in recent bank IPOs, have invested an 'unprecedented' $3bn in their potential lifeline lenders.

 

As The FT reports, Chinese property developers are buying themselves a piggy bank:

Ten Chinese property companies have invested Rmb18.4bn ($3bn) in banks, according to the Financial News, an official newspaper published under the aegis of China’s central bank.

 

...

 

Some of the developers are heavily indebted, sparking questions about the motivation for these deals, and specifically whether the property companies are hoping to use their links to the banks to obtain preferential financing.

 

...

 

There had been some cross-pollination between Chinese developers and banks in the past, with China Resources and Shanghai-based Greenland holding investments in both. But there is no precedent in China for the flurry of recent tie-ups.

Moodys is unimpressed...

Rating agencies have so far taken a cautious view of the deals, noting that property developers are hoping to see benefits but that the investments are still small in scale.

 

We don’t think they [the developers] expect to get funding from the banks directly, but they will be looking for opportunities for mortgage financing for their clients or financing for their contractors,” said Kaven Tsang of Moody’s.

How they are doing it? Through debt-financing ponzi of course...

Developers have been active as cornerstone investors in some of the recent Chinese bank initial public offerings in Hong Kong...made the deal “to better meet its customers’ demands for financial services”.

 

In these IPOs, other mainland Chinese companies have often bought up more than half the total available shares, leading some bankers to label them “IPOs without the P” for public.

 

...

 

But a sharp rise in Evergrande’s debt level has fuelled doubts about the wisdom of devoting capital to a bank stake. Evergrande’s gearing ratio – net debt relative to equity – nearly doubled last year to 160 per cent, prompting Barclays analysts to describe it as “a bit out of control”.

So, in summary, as a Chinese property developer, you are dying in the vine from falling asset prices (new home prices are being slashed as 'investors' are desperate for liquidity) and unavilability of cheap lending.. so you borrow - at whatever rate you can (likely mortgage on already mortgaged property and land) - and use that money to finance a bank IPO buying spree - which may (or may not) enable you to pressure the bank to agree better terms for your loans and enable you to live just another day, week, quarter.

The problems is - the regulators are watching closely now as reforms and graft are increasingly not accepted:

“Whether from the perspective of the banks or regulators, as soon as a property company becomes a bank’s shareholder, their business dealings will become related-party transactions, and so will be controlled and supervised more closely,”

 

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Mon, 04/07/2014 - 09:09 | 4631850 JJSF
Mon, 04/07/2014 - 09:49 | 4631943 Harlequin001
Harlequin001's picture

Why shouldn't they buy banks? Governments do it.

Mon, 04/07/2014 - 09:52 | 4631953 BandGap
BandGap's picture

No shit, this is following a very old American model - GMAC (now "Ally" Bank through the auspices of US taxpayers) always had money raring to go for car purchases.

Mon, 04/07/2014 - 10:17 | 4632040 Manthong
Manthong's picture

As long as the banks keep creating the credit money that allows the developers to buy the banks, everything will be just fine.

What could possibly go wrong?

And.. actually the banks buy the government with credit money they are allowed to create collateralized with governments indenturing of future generations.

It's as much a slave trade as a Ponzi scheme.


Mon, 04/07/2014 - 10:26 | 4632089 Thought Processor
Thought Processor's picture

 

 

 

Problem:  Bank won't extend your revolving loans.

 

Solution:  Buy the bank.  Give yourself the loans.

 

 

Yes, this will end well.

Mon, 04/07/2014 - 11:16 | 4632305 MillionDollarBoner_
MillionDollarBoner_'s picture

I for one am starting to see where this is going and I have to say - hats off to the Chinese !:O)

We should remember that the Chinese have been playing the "fiat game" for many centuries, if not millenia.

They have a wealth of experience in playing this game and are clearly outclassing the Noobs at the Fed.

My expectation is for a dollar collapse long before the Chinese economy crashes. China is gradually revealing tactics which the FEDs didn't even know existed.

Before/during the dollar collapse, which will be precipitated by the Chinese - probably via accelerated sales of UST holdings - the Chinese .gov will exit their remaining UST and USD positions, liquidating them in favour of hard assets. This will include not only gold but it is likely to feature.

Initial position once the dust settles: a China which has industrialised/technologised on the back of US money and is holding the bulk of hard assets, patents and tech; versus a USA with a wrecked, de-industrialised economy and a currency which is no longer the global reserve.

The Yuan will then be the obvious choice for a new global reserve, possibly back by gold or a basket of hard assets. I don't see who could stand in their way - do you?

Finally the Chinese will move in and "mop up" the remaining productive/hard assets of the burned-out USA.

Tell me where I am wrong here...please. I'll be interested in comments.    

Mon, 04/07/2014 - 09:11 | 4631856 Bearwagon
Bearwagon's picture

Hold on to your hard-landing coolie-hats!

Mon, 04/07/2014 - 09:14 | 4631865 caShOnlY
caShOnlY's picture

Here's some MOPE:

Bloomberg reports our budget deficit is at a 7 year low!!!

Lets completely ignore the fact that last's year KABUKI THEATRE govt shutdown purposely allowed the Treasury to place $328 billion spent in fiscal 2013 into Fiscal 2014's budget!!! Expect another Kabuki theatre this Sept as we place $600 billion from 2014 into 2015's budget. It's a given.

http://www.bloomberg.com/news/2014-04-06/america-s-fiscal-health-affirmed-as-treasuries-demand-rebounds.html

Mon, 04/07/2014 - 09:30 | 4631899 negative rates
negative rates's picture

Jefferson's nightmare coming true.

Mon, 04/07/2014 - 09:47 | 4631938 Cognitive Dissonance
Cognitive Dissonance's picture

A little creative accounting never hurt anybody.

<Agreed. It hurts everybody.>

Mon, 04/07/2014 - 09:16 | 4631871 Hughing
Hughing's picture

Too big to fail bank Chinese style. Build house get bank too!

Mon, 04/07/2014 - 09:16 | 4631873 Sudden Debt
Sudden Debt's picture

GET TBTF FAST! Time is running out...

Mon, 04/07/2014 - 09:27 | 4631893 Oh regional Indian
Oh regional Indian's picture

Big swinging dicks need to upward's integrate to survive deflationary tendencies!

ori

Mon, 04/07/2014 - 09:31 | 4631900 Dr. Engali
Dr. Engali's picture

Chinese Property manager #1: Now that we have all these empty cities what are we supposed to do with them?

 

Chinese Property manager #2: I don't know. They are getting awfully expensive to maintain. Let's ask Krugman.

 

Krugman:  Borrow moar money to tear them down and rebuild them. This will create jobs and jobs will create demand.

 

Chinese Property manager #1: What did Krugman say?

 

Chinese Property manager #2: We are fucked.

 

 

 

Mon, 04/07/2014 - 09:36 | 4631910 Ban KKiller
Ban KKiller's picture

Pass out the nail guns and shitgums!

Stay out of tall buildings too?

Mon, 04/07/2014 - 09:57 | 4631962 elwind45
elwind45's picture

Doublemint twins? One over and one under

Mon, 04/07/2014 - 09:42 | 4631921 MFLTucson
MFLTucson's picture

As soon as I read the word Ponzi the thought of the US equity markets

Mon, 04/07/2014 - 09:42 | 4631923 Ban KKiller
Ban KKiller's picture

Chinese adopt fascism. Where did they get that idea? 

Property values can not go down. "Yellen Book of crooked values"  volume one.

Mon, 04/07/2014 - 09:46 | 4631934 Cognitive Dissonance
Cognitive Dissonance's picture

If you can't be with the one you love, love the one you're with.

Mon, 04/07/2014 - 09:57 | 4631971 BandGap
BandGap's picture

Any woman I have ever known hates that song.

Mon, 04/07/2014 - 09:52 | 4631947 vyeung
vyeung's picture

They are buying small and basically irrelevant banks. Last time I checked FT is another full of garage publication. I guess nothings changed.

Mon, 04/07/2014 - 09:52 | 4631952 elwind45
elwind45's picture

When you say China's Central bank do you mean a physical location like town center or does it mean its at the heart of lending ?
The needs of the many out number the worries of a few?

Mon, 04/07/2014 - 10:10 | 4632010 Spectre
Spectre's picture

Reminds me of the early 80's when I was selling Learjets to guys in their late 20-30's who were buying S&L's like cheeseburgers, several per month.  Chinese banks and evelopers are following this exact same route.

We all know how that turned out.

Mon, 04/07/2014 - 10:23 | 4632069 Bunga Bunga
Bunga Bunga's picture

That's nothing. The banks in the US own the Fed from the beginning.

Mon, 04/07/2014 - 10:52 | 4632209 BrigstockBoy
BrigstockBoy's picture

Not a new phenomenon. Real estate developers were involved in the establishment of many "de novo" banks in the US. Look at the slew of failures in Georgia, Illinois or Arizona to see how it ends.

Mon, 04/07/2014 - 11:00 | 4632238 olle
olle's picture

Governments recapitalize banks so the can buy more GB´s, Companies recapitalize banks so they can buy company bonds and give mortages.... what´s the difference..... the game goes on for a while...

Edit: spelling

Mon, 04/07/2014 - 11:21 | 4632341 NotAMathWhiz
NotAMathWhiz's picture

Let me see if I have this straight:

1) Borrow money from bank

2) Use some of the money to build empty cities and malls, use the rest of it to buy stake in the bank that lent you the money

3) Now that you own part of the bank, use that leverage to get it to loan you more money

4) Use proceeds to buy property outside of homeland so you have a place to run when it goes pear shaped

Mon, 04/07/2014 - 11:46 | 4632457 AbbeBrel
AbbeBrel's picture

Hey leverage is bitch on the way down isn't it.   Works great until it doesn't.

 

 

I have a quote for you via Hussman.   He borrowed a quote from Fisher and I am going to borrow it again here.   If something is stolen twice (with attribution) does that make it right?     I dunno.    but:

 

“We will cross the river by feeling the stones.”  (adding "under our feet, one by one")

“Adieu Quantitative Easing… Thus far, much of the money we have pushed out into the economy has been stored away rather than expended to the desired degree. For example, we have seen a huge buildup in the reserves of the depository institutions of the United States. Less than a fifth of commercial credit in the highly developed U.S. capital markets is extended through depository institutions. Yet depository institutions alone have accumulated a total of $2.57 trillion in excess reserves—money that is sitting on the sidelines rather than being loaned out into the economy. That’s up from a norm of around $2 billion before the crisis.

“Through financial engineering, we have helped bolster a roaring bull market for equities… Alongside these signs of rebound have been some developments that give rise to caution. I have spoken of these in recent speeches, echoing concerns I have raised in FOMC discussions: The [cyclically adjusted] price-to-earnings (PE) ratio of stocks is among the highest decile of reported values since 1881. .. the market capitalization of the U.S. stock market as a percentage of the country’s economic output has more than doubled to 145 percent—the highest reading since the record was set in March 2000… Margin debt has been setting historic highs for several months running and, according to data released by the New York Stock Exchange on Monday, now stands at $466 billion… Junk-bond yields have declined below 5.5 percent, nearing record lows… Covenant-lite lending is becoming more widespread. In my Federal Reserve District, 96 percent of which is the booming economy of Texas, bankers are reporting that money center banks are lending on terms that are increasingly imprudent. The former funds manager in me sees these as yellow lights. The central banker in me is reminded of the mandate to safeguard financial stability.

“At the current reduction in the run rate of accumulation, the exercise known as QE3 will terminate in October (when I project we will hold more than 40 percent of the MBS market and almost a fourth of outstanding Treasuries). We will then be back to managing monetary policy through the more traditional tool of the overnight lending rate that anchors the yield curve.

“Enter Forward Guidance: My own view is that commitments aren’t always credible, especially if they purport to extend far into the future. It’s hard to bind future policymakers, and it’s difficult to anticipate all the various economic circumstances that might arise down the road. As a general rule, then, the further into the future a commitment extends, the vaguer it tends to be. Along these lines, the FOMC periodically reiterates its commitment to do what it is legally mandated to do: pursue full employment, price stability and a stable financial system.

“We’ll see. That about sums it up. The FOMC is seeking to make sure that we have a sustained recovery without giving rise to inflation or market instability. We will conduct monetary policy accordingly. Regardless of the way we may finally agree at the FOMC to write it out or have Chair Yellen explain it at a press conference, we really cannot say more than that. As Deng Xiaoping would have phrased it: “We will cross the river by feeling the stones.”

Mon, 04/07/2014 - 12:43 | 4632649 novictim
novictim's picture

.

Mon, 04/07/2014 - 12:41 | 4632650 novictim
novictim's picture

Thank you.  Fisher's comments sound pretty hollow though...we need regulation and brave regulators mandated to thwart fraud at both the banking and investment firm levels and most especially at the government level.

We are so far from this, though, that my comments above sound naive...Scary.

Think about that.

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