Don't blame bank woes on Trump

Editorial | Mary Ma 27 Jun 2019

Investors were gripped by panic after The Washington Post reported that a US judge found three mainland Chinese banks in contempt of court because they refused to comply with subpoenas to provide information to investigators, in relation to a probe into an accusation that a Hong Kong firm had been helping North Korea launder millions of dollars - in breach of UN sanctions.

So, could US President Donald Trump be building pressure on Beijing ahead of his meeting with President Xi Jinping in Osaka? That's the speculation.

Shares of China Merchant Bank plunged more than 7 percent at once, while Bank of Communications lost nearly 4 percent in the Hong Kong market. Shanghai Pudong Development Bank suffered comparable losses in Shanghai despite its denials.

In view of Trump's questionable record, I fear nobody can be 100 percent sure whether he's trying to escalate the situation prior to the summit. By the way, the US Commerce Department had only a few days ago blacklisted five mainland supercomputer companies because they "pose a significant risk" to US national security and foreign policy interests.

That's a category used these days by Washington against Chinese entities - as readily as the criminal code employed by Beijing against dissidents for inciting nuisance.

Therefore, it follows that Trump is expanding the war to finance after trade and technology.

However, I'm reluctant to subscribe to this theory due to the simple reason it isn't in Trump's interest to do so at this moment - if ever. He badly wants a trade deal to pacify the angry American farmers who form his core voting base back home.

The case is an old one, dating back to 2017. Politically, the contempt accusation isn't serious and, as some analysts have commented, could be settled with a limited fine.

Both Trump and Xi will be unlikely to conclude their summit with a trade deal, but would release some good news because they each need to be seen to be making progress in order to boost their own standings domestically.

CMB's deep stock correction was jaw-dropping, being twice that of its peers' losses. It was also spurred by the collapse of investment fund, China Gold Rich, which had been promoting its products by using the bank's name.

Rather, I'm concerned about the long-standing question of Chinese banks' exposure to bad loans, partly due to economic stimulation policies and partly due to mismanagement. As state-owned banks are deemed too large to be allowed to fall, ethical issues arise as management becomes insensitive to risks.

At the start of 2018, bad loans were reported to stand at a level of 1.7 trillion yuan (HK$1.93 trillion), amid efforts by the State Council to crack down on leveraging, and to sell packaged bad debts to new institutions set up to absorb the impact so that banks would remain safe.

But the level of bad loans hasn't declined or even been contained. As 2018 ended, the level of soured loans had reportedly surged to two trillion yuan. That's alarming as it means bad loans had been accumulating more quickly than the measures cleared.

Compared to the situation of bad loans, the accusations reported by The Washington Post were minor.

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