Bank of China joins beggars' queue, more to come

PUBLISHED : Monday, 22 October, 2012, 11:41am
UPDATED : Monday, 22 October, 2012, 11:41am

After a flurry of capital raising in the beginning of the year, China's banks have been silent over the last 6 months despite my previous predictions that 2012 would see a big flurry of money raising by these financially-challenged companies.

But now that silence has abruptly ended with word that Bank of China (3988.HK ; Shanghai: 601988), one of the nation's top 4 lenders, is preparing to raise about 23 billion yuan, or around US$3.7 billion, through a subordinated bond offering.  So now the question becomes: is this the beginning of a new flurry of fund-raising by China's banks? The answer is a definite "probably", though in this case we'll probably simply see the banks that didn't raise capital late last year or early this year engage in new fund raising.

That means we could see names like China Construction Bank (0939.HK ; Shanghai: 601939) and Agricultural Bank of China (1288.HK ; Shanghai: 601288) in major new fund raisings among the top 4 lenders, while many mid-sized and smaller players may also go to market. We're also likely to see this new round of capital raising come mostly in the form of major new debt offerings, as stock holders are unlikely to want to keep paying for these continual new recapitalizations.

The timing of this latest fund-raising by Bank of China is hardly a coincidence, as it comes at a pivotal point between 2 major crises for the Chinese economy. The first of those came in 2008 and 2009, as China took a big hit from the financial global crisis that saw demand for its exports plunge. To cushion the impact of that hit, Beijing ordered its big state-run banks to embark on a lending binge to stimulate the economy, resulting in a big number of bad loans that lenders are now having to cope with.

Even as they deal with that problem, China's economy is now on the cusp of another major downturn due to fading effects of the original stimulus package coupled with lingering sluggish demand for exports. That means Beijing could soon call on the banks to embark on yet another lending binge, even as they are still trying to deal with fallout from the last lending spree.

A number of financial institutions have already raised new capital over the last year and a half, including leading bank ICBC (1398.HK ; Shanghai: 601398) and mid-sized players China Merchants Bank (3968.HK ; Shanghai: 600036) and Minsheng Bank (1988.HK ; Shangahi: 600016). China's top 2 insurers, China Life (2628.HK ; Shanghai: 601628) and Ping An (2318.HK ; Shanghai: 601318), have also raised major new funds, as they also have come under pressure from both the economic downturn and weak performance from China's stock market.

I'm not entire clear why there's been this big gap between Bank of China's new fund raising plan and the last big similar plans, which came from China Merchants Bank and China Life back in March. Perhaps Beijing has been too distracted with other issues like its upcoming leadership change and the rapid economic slowdown to think about new bank fund raising. Whatever the reason, this signal from Bank of China indicates the recapitalizations are likely to resume in the next few months, as the banks get set to embark on another lending binge that will result in more bad debt and further stretch their already weak balance sheets.

Bottom line: Bank of China's new capital raising plan marks a resumption in new fund raising by Chinese lenders as Beijing gets set to launch a new bank-led economic stimulus.