The Best of Times, The Worst of Times, Chinese New Year draws closer: The China Trust Crisis and Bitcoin Deadline
The Best of Times, The Worst of Times, Chinese New Year draws closer:
The China Trust Crisis and Bitcoin Deadline
The TL;DR for those who have not hear of the China trust issue. ICBC (Industrial & Commercial Bank of China), the largest bank IN THE WORLD (and china of course) (http://en.wikipedia.org/wiki/List_of_largest_banks) had peddled a Shadow Banking Instrument (banking activities such as loan taking place outside the usual banking system) China Credit Trust. The Trust looks set to default since the underlying, Shanxi Zhenfu Energy Group had collapsed, and its CEO arrested. “Payment on the three-year, so-called Credit Equals Gold No. 1 product is due Jan. 31.” Allegations had come out that ICBC had represented itself to have guaranteed this Trust, the guarantee not existing of course.
China Credit Trust designed Credit Equals Gold
Of course, there have been no time in history where Credit have equaled Gold. Always pick gold. And that may be the lesson for the affluent buyers of Credit Equals Gold No. 1
Parallels have been drawn to the Lehman minibonds moment, with “eerie resemblances”. It does looks like China will be setting up for its Lehman Brothers moment. China may be intending to prick this shadow banking bubble before it grows even larger and consumes their country. (More at the Bottom)
ICBC has made it clear it wil not bailout investors since reputational damage would be “well manageable,” and former-PBOC adviser Li Daokui adds that “a controlled default is much better than no default,” noting critically that trust defaults “will teach future investors a very important lesson.” Belief that contagion can be “contained” brings back memories of 2008 in the US but a total (or even partial) bailout will merely increase the leverage and risk-taking problem and signal government talk of policy reform is not real.
Risk facing authorities is that a default in which holders aren’t bailed out in full might precipitate panic outflows across the trust and related wealth-management product asset class, triggering a liquidity crisis, which would also ricochet into Hong Kong
If there is a total bailout — or perhaps even worse bailout through the backdoor as some speculate — it will be a signal that the government’s talk of pursuing reform isn’t perhaps for real
A default would be an epochal moment.
Zerohedge: In other words, it could be a “Lehman Brothers moment” for Asia.
China’s Credit Default Swaps have been racing up (think of them as insurance against a bond default)
And more money printing did not ease markets: http://www.zerohedge.com/news/2014-01-21/chinas-liquidity-injection-did-not-calm-all-its-credit-markets
With a large volume of trust products scheduled to mature this year, who bears the losses in the event of a default could set an important precedent. In our detailed research on the China credit outlook last year (see “The China credit conundrum: risks, paths, and implications”, July 26, 2013), we explicitly identified “removal of implicit guarantees” as one of four potential ‘risk triggers’ for a broader credit crisis. If the realization of significant losses by investors causes others to pull back from funding various forms of “shadow banking” credit, overall credit conditions could theoretically tighten sharply
In other words, an Implosion.
This may be 1997 amplified on an even greater scale around the world, as the China shadow banking pops and wipes out China banks, credit, insurance co, equities and derivatives, and going one round around the world to wipe American banks and credit and European banks and credit. Bernanke’s printocopter would have gone full circle. A boomerang to his face.
We have two events too adding to this.
1) Is The China Bank Run Beginning? Farmers Co-Op Unable To Pay Depositors
As China’s CNR reports, depositors in some of Yancheng City’s largest farmers’ co-operative mutual fund societies (“banks”) have been unable to withdraw “hundreds of millions” in deposits in the last few weeks. “Everyone wants to borrow and no one wants to save,” warned one ‘salesperson’, “and loan repayments are difficult to recover.” There is “no money” and the doors are locked.
The locked doors of one farmers’ co-op…
Rough Google Translation:
Salesperson: …the money has been slowly falling and in the end is difficult to ask for money, right? And now there is no money coming in, now people don’t want to save money, and take all the money.
Reporter: But it’s their money, they should be able to…
Salesperson: I know I should [given them money]; however, when the turn started, their is no money, we get cut off and lenders and borrowers took off…
But don’t worry – this should all be settled by 2016…
Yu Long Zhang: we put all of his certificates of deposit are received out. You are only responsible for the loan out of the money back to the people against. The people’s money has been invested in other projects go, we have to be tracked to ensure no loss of capital assets, can dispose of his assets disposed of, can recover quickly come back.
Reporter: There is a specific timetable yet?
Yu Long Zhuang: 2014 cashing out the entire program
Reporter: When did all of these things can be properly resolved?
Yu Long Zhuang: the latest is 2015, 2015, all settled.
So, for the Chinese, their bank deposits have suddenly become highly risky 2 year bonds…
Does this… remind you of Northern Rock?
2) Bank-Run Fears Continue; HSBC Restricts Large Cash Withdrawals
HSBC is the Hong Kong Shanghai Banking Corporation headquartered in London.
Following research last week suggesting that HSBC has a major capital shortfall, the fact that several farmer’s co-ops were unable to pay back depositors in China, and, of course, the liquidity crisis in China itself, news from The BBC that HSBC is imposing restrictions on large cash withdrawals raising a number of red flags. The BBC reports that some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it. HSBC admitted it has not informed customers of the change in policy, which was implemented in November for their own good: “We ask our customers about the purpose of large cash withdrawals when they are unusual… the reason being we have an obligation to protect our customers, and to minimise the opportunity for financial crime.” As one customer responded: “you shouldn’t have to explain to your bank why you want that money. It’s not theirs, it’s yours.”
Doesn’t that make you want to throw some of your cash into Bitcoin?
Well, Jan 31 also happens to be the day the Bitcoin Exchanges find out if their payment mechanisms will be declared legal.
rampant speculation that the China govt is sure to step in to exert “cooling measures” so as not to have a political fallout, and Okcoin seems to have gotten some directives of the Party’s inclinations:
Xu Mingxing, CEO of OKCoin, is a co-sponsor of the Garage Café meet-up too. During his talk, he made a plea to the audience not to use bitcoin as a speculative vehicle. Xu said:
“If the exchange rate shoots up as crazily as in November, there is a good chance that we will spend this Spring Festival behind bars.” http://www.coindesk.com/chinas-bitcoin-exchanges-survived-the-crackdown-battle-aftermath/
The other end of the China dragon lies in the symbolism of the 31st of January. It is the Chinese New Year, or in effect the REAL new year for the business cycle in many Asian countries and of course China. A lot of businesses and business deals will not take place until after the Chinese new year, for both auspicious and practical reasons. A lot of contracts, deals, IPOs, M&As will wait for this crucial time to be over before getting underway. It is a time of many new beginnings, and also endings.
If things are to be happening, this is very well a symbolic date. Also, it is also a period of time where much money changes hands. Any action during this period, is likely to be viewed and interpreted to have meaning. For better or worse.
What if, China actually has plans for bitcoin? For better or worse.
Imagine if Huobi is their version of Federal Reserve in JP Morgan’s Gold and Silver price fixing manipulation. Could that explain Huobi’s volume? Could the exchanges be ordered to follow PBOC directives?
Because, after all, as Zerohedge puts it:
Because then the real scramble for hard assets – or even Bitcoin for that matter – will truly begin…
And it is not as if all of them are unfamiliar with virtual currencies
And then, the merely super-wealthy:
Ma Huateng, Co-founder of Internet giant Tencent
Does anyone remember Qcoin? Which Tencent has just gotten a banking license to reactivate?
To quote Zerohedge again:
Because then the real scramble for hard assets – or even Bitcoin for that matter – will truly begin…
Or maybe dogecoin? ;D
“This case reminds people of Lehman minibonds because complicated credit-linked products were sold to individual investors via bank channels,” said Christine Kuo, senior credit officer at Moody’s in Hong Kong. “It’s not clear whether misselling was involved due to lack of transparency. It’s also not clear who will share the loss. Regardless, both the product packager and distributor have seen their reputation suffer.”
Soros wrote on Jan. 2 in Project Syndicate that while there are “eerie resemblances” with financial conditions before the U.S. crash, China’s government controls the banks and has given precedence to protecting growth over structural reforms recommended by the central bank. The contradiction in China’s policies is that “restarting the furnaces also reignites exponential debt growth, which can’t be sustained for much longer than a couple of years,” he wrote.
ICBC Chairman Jiang Jianqing told CNBC in Davos, Switzerland, that the lender won’t “rigidly” pay out on the trust and the incident will be a lesson on risk for investors and a chance to educate trust companies and his own bank.
The potential failure of the trust could expose the vulnerability of China’s banking industry, Standard & Poor’s wrote in a report today. While ICBC probably won’t bail out the investors, S&P said, such an action could raise questions over its liabilities and lead to a debt-rating review.
Chang Feng, 33, a finance-industry worker from Shanghai, who teamed up with his uncle to invest a combined 3 million yuan in Credit Equals Gold in 2011, said he was offered “implicit guarantees” of repayment by a product manager at ICBC.
“Originally, I didn’t plan to invest in a trust-related product,” said Chang, a spokesman for the protest group. “But ICBC’s product manager told us the project will be guaranteed by the bank. There’s no way to prove it now. We didn’t record it. We trusted ICBC.”
Update: Reports are out that ICBC Credit Trust arranged restructuring pact, details unknown