Cross-posted from Kate McKenzie at FT Alphaville
Chinese authorities are continuing their efforts to finish mopping up the bad debts left from the big bank bailout of 1999-2000, in what some believe is an attempt to address — or, head off — another financial crisis.
So far we’ve seen IPOs, private capital raisings, quietly retiring bonds, and pushing for a big expansion of securitisation.
And now… from Reuters:
On Friday, the securities regulator said banks – and other listed firms – could also issue non-tradeable preferred shares. That offers another avenue for banks to bolster their balance sheets with funding from commercial investors, and possibly a way for the government to inject capital directly if private funds aren’t enough.
In an article published last week, China’s central bank governor, Zhou Xiaochuan, cited the U.S. government’s rescue in the global financial crisis of American International Group Inc as a positive example of how preferred shares could be used.
Chinascope Financial had some more detail on Zhou’s statement. Oddly enough, his article was apparently about “increas(ing) government support for financial innovations”. But this is the gist of what he went on to say, according to Chinascope:
To fully exemplify the importance of preferred stocks as a capital market instrument, Mr. ZHOU introduced the U.S. government’s approach in rescuing American International Group Inc. (A.I.G) amid the 2008 financial crisis. While most European countries would recommend the U.S. to nationalize A.I.G., the U.S. tended to use financial instruments for fear that excessive government intervention would dampen private businesses’ initiative and reduce market efficiency. In the end, the U.S. government chose to buy A.I.G’s preferred shares in the bailout to ease the company’s liquidity, rather than injecting funds directly into its entity.
Two thoughts occur. The first: do you really want to start talking about the AIG bailout if you think your banking system is perfectly stable? Zhou is clearly not as sanguine about China’s financial system as some would like.
Secondly, while talking openly about the AIG bailout seems kind of odd, it also fits in well with the recent news flow suggesting the government is gearing up to another round of bad debt bailouts.
The government clearly doesn’t want to be identified as having directly bailed out the banks (read some background on the 1999/2000 bailouts here, here, and here).
Plenty of other governments have bailed out their banks, of course, and many carefully chose an approach to avoid charges of outright nationalisation.
The question is whether the bad loans will be recognised as such, before being bailed out? That didn’t happen with the last round of Chinese bank bailouts — the Asset Management Companies bought the loans at face value in exchange for bonds, some of which were surreptitiously paid back by government entities.
