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Why is China Recapitalizing ... its Best-Capitalized Banks?
The recent announcement of a recapitalization of the big six Chinese banks was unusual. These banks have by far the healthiest capital adequacy in a system with relatively undercapitalized banks. In this report we explain the repercussions and rationale of why this is likely happening and what it means.
Key conclusions are as follows:
* This is probably a fiscal signal. A RMB1 trillion capital injection can be levered around 12 times to create a lot of liquidity to fund state industrial policy and other targeted financings and refinancings.
* There is also a possibility that the government recognizes the outsized impact that certain monetary policies will have on the big six banks' net interest margins (i.e., mortgage rate cuts) and thus they are moving proactively to shore up these banks' capital in anticipation of weakened organic equity growth.
* We disagree with certain market views that this is a sign of asset quality problems at the big six banks or that these capital injections are a signal of their imminent participation in the clean-up of other lenders around the country.
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