China's economy has a huge bearing on the American markets. It is no secret that over the summer the economy in China slowed down and initially our markets also reacted by pulling back. There are some signs that continue to take place in the financial system of that country that are very important for investors to be aware of. There seems to be an awareness of increased risk in the Chinese financial system and is important that it does not go unnoticed by investors here in America.
China Bank Problems
Goldman Sachs (GS) rid itself of its holdings in one of the largest banks in China- Industrial & Commercial Bank of China (OTCPK:IDCBY). Why did it do this? Recently, bank of America (BAC) dumped its stake in China Construction Bank (OTCPK:CICHY). Is there a reason for this that investors should be aware of?
Both Goldman Sachs and Bank of America know something about risk. This summer the powers that be in China put the skids on risky investing by the banks and this resulted in the economy contracting. Recently it appears that the officials have softened their stance and allowed more lending to take place because they feared that the economy might contract more than they wanted.
The qualities of assets that are owned by the Chinese banks have come into question. China Construction Bank wrote off over $800 million in bad loans the first half of 2013. Did you know this is almost four times as much as it did the year before?
Shibor & Repo Rate Spikes
Here's an interesting statistic for you. If you're familiar with Libor (London Interbank Offer Rate) you will know it is the interest rate that banks charge each other for short-term loans. What happens when banks don't trust each other? They charge higher rates. The European meltdown a couple years back saw these rates elevate. China's version of Libor is "Shibor" (Shanghai Interbank Offered Rate).
Libor increased almost 9 months before Lehman showed signs of trouble, and in mid-June the Shibor shot up 12%. If history repeats itself, this could be a sign that we may have more serious problems with Chinese banks. The end of this quarter will see banks rolling over debt, which is about the same time that bank "loan collateral assets" end up being closely probed. There is a good chance that the markets may be in for a roller coaster ride when this takes place. If the Shibor spiked at the end of last quarter, do investors think it will be much different this quarter?
The Chinese "repo rate" is an interest rate used in a particular type of interbank lending. This rate also spiked recently. When you combine the Shibor with the "repo rate" spike, this has a detrimental effect upon lending as a whole because it's the lifeblood of the whole financial system. China is a huge economy and the world depends on its growth. If the banks in China go through financial difficulties even close to what the banks in United States went through in 2008 stocks around the world will be affected.
Why did the CDS prices for two British banks - HBSC (HBC) and Standard Chartered (OTCPK:SCBFF) which are heavily invested in China, go up so quickly? Is the exposure to risk these banks have in China that much worse? Investors have been shorting these two banks. When investors "short a stock" they borrow shares and then sell them in hopes that the stock will fall so they can pay back the stock loans with cheaper shares later on. Investors are bearish on these two British banks that have a heavy exposure to risks in China.
Because China's economy has a huge bearing upon the American market, it is important to take note when risk factors become higher in the financial sector in the Chinese economy. I cannot say to you that we have signs of a financial meltdown in the nation, but I believe it's important to stay abreast of developments and what they could possibly lead to. Investors, be aware that "financial risk" is getting riskier in the financial sectors in China