Thanks to tighter liquidity conditions in China's financial system – and quiet direction from the regulators – China's banks have substantially increased write-offs of non-performing loans (NPLs) since the beginning of 3Q13. Particular banks may well have to seek new capital in 2014. However, ongoing disposals of NPLs, and the further development of markets for asset-backed securities (ABS) may well provide investment opportunities in the coming year.
The hugely successful initial public offering (IPO) of China Cinda Asset Management Corporation (1359:HKG) highlights two major trends that are likely to continue into 1H14. One is the revival in IPO activity on the Hong Kong Exchange, the other is the sharp rise in disposal of non-performing loans (NPLs) by banks in mainland China. China Cinda now has a treasure chest of $2.5bn in new funds, 60% of which will be used to bid for NPLs.
Rising from $31.1bn in October to $33.8bn in November, China’s trade surplus is at the highest level since January 2009. This is in spite of the recent strength in renminbi, which appears likely to continue in the short term. Indeed, a factor that has been a major contributor to the rise in the surplus has been the slow growth of imports.
The strength of renminbi in the recent past is clearly expected to continue. Offshore renminbi (CNH) deposits in Hong Kong have been surging. This is at a time when the Hong Kong Monetary Authority (HKMA) has raised concerns over rapid growth in lending by the banks. It is highly likely that at least some of the increased deposits will find their way to CNH-denominated dim sum bonds.
Chinese banks are facing a number of challenges as the authorities in Beijing seek to crack down on the various excesses of the last few years. This is clearly having an impact on the banks’ performance metrics: as a result, they are in need of capital. In turn, the Hong Kong IPO market has received a boost on the back of this.
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