Several institutional investors - including Kynikos Associates, Grantham Mayo van Otterloo and Vontobel Asset Management - are predicting that Chinese bank stocks will fall off the cliff. The MSCI China Financials index fell 24% in September. They believe the banks have too many bad loans to local provincial governments, a slowing real estate market and a slowing economy. In Liaoning province, 85% of the government financing vehicles are struggling to repay their debt obligations. Real estate developers are also seeing higher borrowing costs as banks cut their lending.
Since 2008, the banks have loaned $3.8 trillion. A major portion went into infrastructure and real estate. In five years, real estate prices have risen 60%. Jim Chanos of Kynikos has short positions on almost all the banks. He believes that they will fall below the value of their net assets. Currently, the banks trade at a 20% premium to their assets. They still have bad loans from prior banking crises and the local government debt has grown to 200% of the gross domestic product. As in the US, they may have to raise capital to reserve against bad loans and expanded lending.
A sellside analyst, Mike Werner of Sanford Bernstein, says that the growing Chinese economy will limit the amount of bad loans. If these loans do increase greatly, the banks will be less profitable but will not collapse. The Beijing government would prop them up.
Some of the bank stocks include Agricultural Bank of China, Bank of China, China Construction Bank, China Merchants Bank and Industrial & Commercial bank of China.
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