China Merchants Bank''s rights issue won''t address all its capital woes

Date Feb 24 2010 14:20:36 Source:FinanceAsia

The long-awaited $3.2 billion rights issue of China Merchants Bank (CMB) is one step closer to happening. The lender has announced a plan to offer 1.3 new shares for every 10 held by investors of its Shanghai- and Hong Kong-listed stock, but analysts warn the bank will remain a thinner capitalised lender even after the capital replenishment.

CMB, the country''s fifth-largest lender by market value, has seen its core capital deteriorate and a significant rise in leverage after its expensive acquisition of Hong Kong''s Wing Lung Bank and rapid loan expansion over the last 12 months. Proceeds from the fundraising will be insufficient to shield the bank against hidden credit risk, analysts say.

There is also ongoing speculation that China Banking Regulatory Commission will take further measures to tighten credit growth in China --- a major source of income for all lenders in the country. The banking regulator has warned it will refuse approvals for business expansion and limit banking operations if lenders fail to meet the capital adequacy requirements. The tightened rules are forcing Chinese banks to look for tens of billions of dollars in fresh capital from the equity markets.

CMB will issue 2.48 billion new shares comprising approximately 2.03 billion A-shares to investors in Shanghai and 449 million H-shares in Hong Kong, the bank said in a filing to the Shanghai stock exchange late on Monday.

As of February 21, the bank had a total of 15.65 billion outstanding A-shares and 3.46 billion H-shares, according to the filing. The offer would price the lender''s new shares at Rmb8.85 apiece to its renminbi-denominated A-shares; and HK$10.08 each to its H-shares, according to analysts.

By comparison, Shanghai and Hong Kong-listed shares in CMB have been trading at an average of Rmb16.7 and HK$19.6 respectively over the past three months, data from Bloomberg shows.?The rights issue would ease the bank''s capital pressure considerably, however, even after the cash replenishment, CMB''s capital will remain thin compared to other leading banks in China, said She Minhua, a banking analyst at Haitong Securities in Shanghai.

"The offering will increase CMB''s tier-1 capital ratio to about 9%, while Chinese banks average is 9 to 10%," he said, adding that the bank would report a 2009 profit of Rmb17.2 billion representing an 18% decrease year-on-year.

Fitch Ratings recently downgraded CMB''s creditworthiness to ''D'', which is the seventh grade in a scale of nine grades from ''A'' to ''E'', to reflect the bank''s weakening standalone credit risk.

"Subtracting intangibles from the acquisition [of Wing Lung Bank], CMB''s ratios of tangible assets and tier-1 CAR (capital adequacy ratio) dropped to 3.8% and 6.6% respectively in the third quarter of 2009," Charlene Chu, head of Fitch''s financial institutions ratings in Beijing, wrote in a report.

Fitch notes that CMB''s planned Rmb22 billion rights issue should bolster capitalisation considerably. However, even after this exercise, core capital is likely to remain just on par with other Chinese peers rated ''D'', she said.

Fitch downgraded CMB and China Citic Bank on the same day saying they are carrying additional hidden credit risk because they are also active issuers of wealth management products that are packed with loans.

Fitch''s report was released before the holiday week of Chinese New Year, and was the firm''s first downgrade rating in Chinese lenders over the last six years. The report casts a shadow over the nation''s banking sector.

However, Standard & Poor''s said the government is likely to extend "extraordinary support" towards important banks if they run into financial difficulties.

"The government is the largest shareholder of many Chinese banks, and some can attribute some of their historical and potential bad loan problems to the government''s encouragement to support the economy," it said in a research note.

CMB first indicated that it was in need of new capital last August after it agreed to pay 3.1 times book value for a controlling stake in Wing Lung Bank. The deal was the most expensive bank acquisition on record in Hong Kong.

Bank of China, the most aggressive state-run bank in terms of expanding its loan books last year, said last month that it plans to sell up to Rmb40 billion ($5.8 billion) of domestic convertible bonds to replenish its capital.

Chinese banks have come under strain after last year''s excessive lending, which totaled Rmb9.6 trillion. Bank of Communications estimates China''s listed banks will need to raise Rmb200 billion from the equity markets to re-fill balance sheets this year, while BNP Paribas forecasts the country''s lenders need Rmb368 billion to ensure adequate capital.

CMB didn''t name the underwriters in the stock exchange filing but it''s reported that China International Capital Corp and UBS are arranging the rights issue.

The announcement sent CMB''s shares lower in Shanghai where its shares fell 1.72% and ended at Rmb15.46. The Hong Kong-listed shares regained losses before the end of trading and closed at HK$18.94, about 1% higher.

Citi''s Asia-Pacific head of investor sales Shahryar Mahbub quits

Date Feb 24 2010 14:19:57 Source:FinanceAsia

Yesterday, Shahryar Mahbub resigned from his post as Asia-Pacific head of investor sales with Citi. Mahbub, who is based in Singapore, had held the post since 2004.

Mahbub is a Citi veteran. He joined Citi in Pakistan in the Karachi office in 1998. Before taking up his current appointment, he was based in New York where he spent eight years as a senior member of Citi''s emerging markets fixed-income sales group. A Citi spokesperson confirmed that Mahbub has left the bank, adding that a new leadership structure for the global markets sales division will be announced in the near future.

The investor sales business falls under the umbrella of Citi''s markets business, which is currently co-headed by Rodrigo Zorilla and David Ratliff.

Some sources said that Mahbub''s departure is driven by a reorganisation of the markets business which will see Zorilla take sole charge. Mahbub was reluctant to get layered and hence decided to put in his papers, according to sources.

However, other sources said Mahbub has been scouting for a new opportunity and perhaps a larger canvas, even before the recent reorganisation at Citi. The sources added that Mahbub is likely to take up a leadership role in fixed-income sales at UBS.

UBS declined to comment and FinanceAsia was unable to reach Mahbub for comment.

"Payouts at Citi happened last month so we''ve been expecting to see some movement, but Shahryar''s resignation is still a surprise," said a banker in sales at another firm.

Citi''s markets business employs almost 1,500 staff across 18 countries within the region and is an area that Citi has invested in heavily during the past year. In October 2009, Citi announced the appointment of John Jacobson as the Asia-Pacific head of equity sales, a role that reported directly into Mahbub. Other hires in the past six months include Adrian Faure to head Asian equities, Brent Robinson to head investment research, Joseph Chang to head equities trading and Paul Sanger to head executive services.

Citi''s effort to bolster its manpower has also been accompanied by key business moves within the region. In January of this year, the bank announced that it would be setting up a domestic Malaysian equity brokerage business. In addition to this, Citi attained an interbank bond market maker license in August 2009; a licence that gives Citi the right to trade in China''s local bond market.

Job seekers pounce on openings in Year of Tiger

Date Feb 22 2010 16:03:02 Source:China Daily

March and April high time as companies lay out annual plan for new employees

As the lunar new year ignites a steady supply of pyrotechnics, so too are the feelings of the city''s employees being fired up with the promise of new jobs after the economic crisis.

"It will be a new scene for a new year, and I want to find a new job with greater potential," said a female employee surnamed Hou, 25, who has worked in a PR company in Beijing for two years.

Hou said she has long wanted to quit her job but held back due to the troubled job market. She added that there are usually more opportunities after Spring Festival.

"March and April are the best months to find a new job. We named these two months as ''Golden March and Silver April''," said Ba Ran, senior employment consultant with, a renowned website for job hunting.

Ba said job opportunities are abundant during the period after Spring Festival because companies have usually completed their recruitment plans for the year and just released their job vacancies. She added there was more at play though than just the promise of new work.

"The year-end bonus is another important reason, of course," Ba said.

It can be good timing to change jobs after Spring Festival because many companies have just paid out their annual bonuses, Ba said.

She said a year-end bonus is a reward for the previous year of hard work, and no employee would give it up by quitting early.

Hu Chun has worked in an IT company for one year, but quit just before Spring Festival.

"I could not decide when to quit because I was unsure if I could get my annual bonus," she said.

Finally, she made her decision after talking with her supervisor, who promised to give her the bonus despite the timing.

Hu said she quit because she could not find opportunities for promotion within the company, considered the principal reason for job-hopping over recent years, according to a report from

The report, released on March 19 last year, analyzed job-hopping after the 2009 Spring Festival. It stated that more than 30 percent of employees changed jobs because of a lack in opportunities for career development. The second main reason concerned salaries.

Ba with said these two reasons would continue into 2010 in Beijing.

She forecast companies in the education, training, automobile and environmental industries would probably witness a large number of job applicants over the next couple of years.

Business in these industries is on the rise and related companies will need more employees to handle the workload, Ba said.

New policy to encourage China''s carmaker consolidation

Date Feb 22 2010 16:01:10 Source:Xinhua

BEIJING, Feb. 22 -- The Chinese central government plans to implement a new policy in the first half of this year to encourage auto industry consolidation and further the development of Chinese-brand passenger vehicles, an official from the Ministry of Industry and Information Technology said at a recent news conference.

According to sources with knowledge of the new policy, it intends that Chinese-brand passenger vehicles will comprise at least half of vehicle sales by 2015 and sedans made by entirely domestic automakers will have about 40 percent of the nation''s car market.

Statistics from the China Association of Automobile Manufacturers (CAAM) show that 4.58 million Chinese-brand passenger vehicles were sold last year, some 44.3 percent of the total.

Sales of domestic sedans hit 2.22 million units, almost 30 percent of the segment.

The new policy will also focus on accelerating consolidation between automakers and could lead to a new round of reshuffling, industry insiders said.

China became the world''s largest auto producer and market last year with both production and sales surpassing 13.5 million vehicles due in part to government incentives.

There are now more than 130 carmakers across the country, but most of them are small enterprises with annual production and sales of fewer than 10,000 units.

Only five had sales of more than 1 million units last year as the country''s top 10 carmakers moved a total of 11.89 million vehicles to account for 87 percent of overall sales, according to market data.

Consolidation moves

Last year, Chang''an Motor Corp acquired two minivan makers - Hafei and Changhe - as well as engine producer Dong''an Auto from the Aviation Industry Corp of China (AVIC), marking the biggest asset deal ever between State-owned auto companies.

Chang''an is the fourth-largest motor group in China and the local partner of US carmaker Ford Motor and Japan''s Mazda and Suzuki. After the acquisition, Chang''an''s 2009 sales were only 30,000 units behind Dongfeng, the country''s third-largest motor group.

Guangzhou Automobile Group Corp, the country''s sixth-biggest automaker, bought a 29 percent stake of Shanghai-listed SUV maker Changfeng Motor Co Ltd for 1 billion yuan in May last year.

Beijing Automobile Industry Holding Corp, China''s fifth-largest carmaker, reportedly finalized a deal last month to buy a 40 percent stake in Daimler AG''s van joint venture with Fujian Motor Industry Corp.

By 2012 policymakers hope consolidation will result in two to three large-scale auto groups, each with annual production capacity surpassing 2 million units, and four to five companies with annual output of more than 1 million vehicles, according to the national auto industry revitalization plan released in March last year.

The current top-four Chinese motor groups are SAIC Motor Corp, FAW Group, Dongfeng Motor and Chang''an Motor. Carmakers including Beijing Automobile, Guangzhou Automobile, Chery, Geely and Sinotruk form the second tier in the country''s auto industry.

Going global

Li Yizhong, minister of Industry and Information Technology, said recently that in addition to fueling industry consolidation, the government will also implement measures to encourage domestic automakers in reaching overseas this year through investment, acquisition of foreign brands, building research and development facilities and developing sales networks.

Industry sources said that the new policy calls for 20 percent of overall sales by major auto groups to be generated overseas in the next few years.

In the wake of the financial crisis, China''s vehicle exports fell sharply by 45.7 percent to 369,600 units last year, according to statistics from the General Administration of Customs. Industry analysts generally expect a rebound in car shipments this year as the foreign markets begin to recover.

Despite the poor export performance, Chinese companies were aggressive in acquiring overseas assets in 2009.

Homegrown carmaker Geely''s bid for Swedish luxury brand Volvo received a lot of media exposure in 2009. The Zhejiang-based company will reportedly close the deal soon.

Beijing Automotive bought some of Swedish carmaker Saab''s core assets and technologies for $200 million last year.

Li noted that along with encouraging acquisitions and consolidation, the government will restrain overcapacity in the auto industry.

Li also said that the ministry will accelerate the development of new energy vehicles, including hybrid, pure electric and fuel battery models.

The new policy will reportedly stipulate that Chinese partners hold at least a 50 percent share in newly built Sino-foreign joint ventures that produce core parts for alternative-energy vehicles.

(Source: China Daily)

Editor: Wang Guanqun 

China''s new credit rules put brakes on banks'' lending binge

Date Feb 22 2010 16:00:36 Source:Xinhua

BEIJING, Feb. 21 (Xinhua) -- With Chinese banks'' record new lending in 2009 igniting fears about asset bubbles and bad loan, the banking regulator''s latest rules aim to bring financial risk under control.

The new directives order banks to focus on loan quality control, rather than quantity restriction, and aim to make loans flow to the real economy -- rather than the property and stock markets, which are susceptible to asset bubble formation.

Analysts say the directives are a smart way to handle the policy dilemma the central bank faced: with inflationary pressures growing after increased money supply, how can monetary policy be tightened without hurting the fragile economic recovery?

The China Banking Regulatory Commission (CBRC) issued new regulations on Saturday evening telling banks to set lending quotas after "prudent calculation" of borrowers'' "actual demand".

It also reiterated working capital should not finance fixed-asset investment and equity stakes. The new rules also ask lenders to give funds directly to the end user declared by the borrower, instead of directly giving it to the debtor, in an effort to ensure loans are used for their declared purpose.

Execution of the directives will help banks exit the "credit stimulus spree", as they pay more attention to risk control. The directives are crucial for the banks'' sustainable expansion, said Yu Xiaoyi, analyst with Guangfa Securities.

Loose oversight and easy monetary policy have led to many banks developing the bad habit of being excited about loan extension but indifferent to the tracking of loan use, which can result in credit appropriation, an unnamed insider told Xinhua.

That allowed many Chinese enterprises to borrow much more than they needed in order to speculate with various types of investment, even though they had ample funds on hand for their routine business operations.

In support of the government''s 4-trillion yuan stimulus package, Chinese banks lent an unprecedented 9.6 trillion yuan in 2009, nearly half of 2009 gross domestic product.

Researchers said that large amounts of the borrowed funds went into property and stock market speculation, further pushing up soaring house prices and further inflating asset bubbles.

According to official data released by CBRC, some regions reported two to three percent of funds were misappropriated.

Wang Kejin, an official with the Supervision Rules and Regulation Department of CBRC, told Xinhua "the current working capital and individual loans exceeded real market demand,"

The inadequate monitoring of loan use demands improvement, otherwise creditors will suffer losses and systemic risks will build, the CBRC said in a statement on its website.

"Our purpose was to prevent it happening," the statement said.

Ba Shusong, a researcher with the Development Research Center of the State Council, China''s cabinet, said the new rules will further strengthen credit risk controls and put a "brake" on lending and keep the financial system in good health,

Guo Tianyong, a professor with the Central University of Finance and Economics, said the new directive will prevent systemic risk after the rapid expansion in credit.

Although the CBRC and the nation''s central bank have repeatedly warned banks to maintain an even pace in lending growth and to avoid big fluctuations, new yuan loans hit a massive 1.39 trillion yuan in January, as banks scrambled to lend before an expected tightening in credit later in the year.

CBRC chairman Liu Mingkang said on Jan. 27 the Chinese government is aiming to restrict credit supply to 7.5 trillion yuan (about 1.1 trillion U.S.dollars) in 2010.

Analysts expect short-term loans to fall significantly on account of tougher lending requirements that prevent businesses using new loans to repay old credit, a phenomena rampant when bill financing with 180-day maturity comprised nearly half of new loans in the first quarter of 2009.

To soak up the excess liquidity on the heels of lending spree, China has raised the deposit reserve requirement ratio (RRR) twice this year, after holding it steady for over a year, to handle the "comparatively loose liquidity" while keeping the "moderately easy" monetary policy unchanged.

Jing Ulrich, Chairman of China Equities and Commodities at JP Morgan Chase, estimated China''s new lending would fall 17 percent this year as the government takes steps to prevent inflation.

"While lending support for real economic activity is expected to continue, banks are likely to be more vigilant on shorter term credit facilities, given the regulator''s anxiety over asset bubbles and capital adequacy ratios," she said.

Editor: Mu Xuequan