New | The cat prevails over the mice in China’s money mill, for now
With the central bank’s latest directive, financiers face the challenge of keeping the money mill running as quickly as ever. They’re working hard on that.
The money mill that undergirds many of China’s aggressive -- if not reckless -- assets buying in Hong Kong and overseas may be coming to a temporary halt, if the cat has the upper hand this time.
In an effort to protect the yuan, the People’s Bank of China issued a directive late last month to rein in cross border borrowing that has been fuelling the mill.
On the radar are not only 24 mainland banks but also three overseas lenders -– HSBC, Citibank and Standard Chartered Bank.
Before discussing the cat’s move, let’s recap what the mice have been doing to stockpile their cheese in the past year or two.
- Step one: Sign a contract to buy a piece of land, a hotel chain or a prestigious apartment block overseas that costs, say HK$10 billion. As always, it doesn’t have to be genuine.
- Step two: Pledge a mainland Chinese asset with a mainland bank for a standby letter of credit (SBLC), which is a promise by the bank to pay. Use the SBLC to get a loan in Hong Kong to pay for the asset.
- Step three: Pledge the overseas asset with the banks in Hong Kong to get a HK$5 billion loan
- Step four: Pledge the HK$5 billion cash with another bank for a SBLC.
- Step five: Use the second SBLC as security at a mainland financial institution to purchase top notch bonds. Pledge the debentures for another SBLC at HK$3.5 billion, given a routine discount of 30 per cent for financial products.
- Step six: Use the third SBLC as collateral and get a HK$3.5 billion loan in Hong Kong. Repeat step four and five and so on so forth.
The result is a swift creation of capital, which can be as high as HK$28 billion, and the moving of more than HK$15 billion out from the country in our hypothetical example.
