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China’s CCB found to have ‘lending irregularities’

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How safe is it to invest in China?  Amidst the turmoil in the Western financial markets, Temasek Holdings, if you recall a while back, had jettisoned its stakes in Barclays and BoA to free up capital for investment in developing markets such as China and India.  Yesterday’s WSJ reported that China Construction Bank, which Temasek bought into earlier, was found to have committed some “lending irregularities”:

SHANGHAI — China’s National Audit Office uncovered lending irregularities and improper activities in a routine check of three of the country’s major banks last year, the lenders said.

Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and China Citic Bank Corp. said in separate statements that the findings won’t have an impact on their results or materially affect past earnings.

None of the three banks disclosed the size of the irregular loans. The country’s chief auditor, Liu Jiayi, said in February that his office uncovered some serious illegal activities involving six billion yuan ($878 million) during an audit last year of several financial institutions, including ICBC, China Construction Bank and Bank of China Ltd.

“Thanks to insufficient supervision and regulation, some enterprises fraudulently obtained loans by colluding with the bank’s employees,” China Construction Bank said. The bank said it has recovered most of the irregular loans and the outstanding amount will be recovered shortly.

Despite improved corporate governance and solid financial positions after Beijing spent trillions of yuan to restructure the country’s banks, most lenders still lack proper risk-control procedures at some of their branches, analysts say.

Indeed, one should expect that in developing markets, there are less transparent standards of accounting.  Asian Investor in particular, wrote on June 1st that the influx of foreign investors such as Singapore’s two SWFs seeking safer and more promising returns from the toxic financial debris of the United States and Europe have caused Chinese stocks to become over-valued:

While the consensus is clear that China’s economy does hold significant promise, not everyone is convinced it deserves blind faith. And with valuations of China shares rising so rapidly this year, some fund managers are finding it hard to justify the gains.

“There is no doubt that China’s economy is strong relative to developed market economies. Strong growth in bank lending, a boom in fixed-asset investment and resilient consumption are painting an attractive picture and encouraging investment in the equity market,” says Nick Scott, Hong Kong-based CIO for Asian equities at BlackRock. “However, this must be tempered with a note of caution.”

“China’s ability to stimulate the economy is unparalleled, and data over the last couple of months suggest that government measures are gaining traction. It is understandable, therefore, for managers to be bullish on China,” says Ebrahim. “However, it is becoming a crowded trade, and not all companies will benefit from government policy in a sustainable way. It is key, therefore, to look closely at each company’s operating model and strategy and to be disciplined in assessing valuations,” Ebrahim says.

The extreme stimulus measures being employed by China, and the rapid loan growth in the first quarter of this year, may create risks in the medium-term that investors should be aware of, Ebrahim adds.

“China’s ability to stimulate the economy is unparalleled, and data over the last couple of months suggest that government measures are gaining traction. It is understandable, therefore, for managers to be bullish on China,” says Ebrahim. “However, it is becoming a crowded trade, and not all companies will benefit from government policy in a sustainable way. It is key, therefore, to look closely at each company’s operating model and strategy and to be disciplined in assessing valuations,” Ebrahim says.

The extreme stimulus measures being employed by China, and the rapid loan growth in the first quarter of this year, may create risks in the medium-term that investors should be aware of, Ebrahim adds.

Another bubble in development?  See this written earlier as well.

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Written by defennder

June 25, 2009 at 2:12 PM

One Response

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  1. Nice!

    macromedia

    July 8, 2009 at 4:44 AM


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