Chinese banks swap transparency for debt

Abracadabra. Beijing is trying to do to its mammoth debt what David Copperfield has done to the Statue of Liberty – make it disappear, at least for the moment.

And the magic seems to be working, at least as far as the public records of its listed banks are concerned. Under a programme with the misleading title of “asset replacement”, Chinese banks last year swapped 1 trillion yuan of their loans to debt-ridden quasi-government financial arms into bonds of the parent local government. Yet, you will find no trace of that in the company announcements or financial statements of any Chinese bank listed in Hong Kong – except one.

The Bank of Qingdao is the only bank that has left any clue on the swap. Its 2015 annual report said: “Affected by the asset replacement of local governments, and to enhance the financial cooperation with and support to local governments, the company increased investments in local government bonds, resulting in an increase in held-to-maturity investments.”

The change in government bond investment can therefore be taken as a measure of the size of the swap. Going by that yardstick, your diligent columnist pored over the financial statements of 10 provincial and city banks listed in Hong Kong and calculated that they have forked out more than 57 billion yuan for government bonds under the swap deal.

This is what Money Matters found: all provincial and city banks have seen a jump in their government bond portfolio. The bond holdings more than doubled at six of them. Newly listed China Zheshang Bank tops the list with a 210 per cent jump of over 14.5 billion yuan.