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Inaction Means Student-Loan Rates Will Double Next Week

The rate that undergraduates from poor families pay for student loans will double on July 1. U.S. senators have departed for a one-week break without an agreement on what do to about the automatic increase.

The interest rate for subsidized Stafford loans, available to undergraduates from low-income families, will increase to 6.8 percent from 3.4 percent. More than 7 million students borrow through that program.

With one group of senators pushing for a floating interest rate and another group seeking a one-year freeze, action was postponed until after the new rate takes effect.

Senate leaders have agreed to schedule a July 10 procedural vote on S. 1238, a bill that would keep current rates in place until 2014, said Rhode Island Democrat Jack Reed.

Questions to be resolved when senators return include:

— Should interest rates be frozen?

— Should interest rates be allowed to rise and fall by linking them to Treasury notes?

— If the rates are linked to Treasury notes, should there be a cap, or maximum rate that students can expect to pay?

— Should the interest rate be set exactly where the government breaks even, or should it be higher to bring in extra money for deficit reduction?

“The best option for students is extension of the 3.4 percent rate for one more year,” Reed told reporters.

The Education Department can administratively handle a retroactive interest-rate adjustment, he said. That “can be accomplished fairly easily,” so “we’re in a position where we have a window,” Reed said.

“There’s no particular drop-dead date,” he said.

Debt Loads

The share of 25-year-old Americans with student debt increased to 43 percent last year from 25 percent in 2003, according to the Federal Reserve Bank of New York. During that nine-year period, the average education-loan balance of people in that age group increased 91 percent, to $20,326 from $10,649, according to the New York Fed.

In the aggregate, student-loan debt totals almost $1.2 trillion, according to the Consumer Financial Protection Bureau.

Economists warn that what is owed in student loans may rival home-mortgage indebtedness as a drag on U.S. growth.

“The difficulties borrowers face when trying to manage cash flow may have a broader impact on the economy and society,” Rohit Chopra, the consumer bureau’s student-loan ombudsman, told the Senate Banking Committee on June 25. “When young workers are putting large portions of their income toward student-loan-payment payments, they’re less able to stash away cash for that first down payment.”

Loan Types

The most popular government loan is the Stafford.

Subsidized Stafford loans are limited to students with lower incomes, and the interest rate is 3.4 percent, set by Congress. The government pays the interest during school. The interest rate will increase to 6.8 percent on new originations if Congress doesn’t act by July 1.

Any undergraduate, regardless of income, can get an unsubsidized Stafford loan at a rate of 6.8 percent.

The federal loan limits for undergraduates are $5,500 the first year, $6,500 the second year and $7,500 in the last years. Graduate students no longer dependent on their parents also can take out Stafford loans.

Another type of direct federal loan, called PLUS, carries a rate of 7.9 percent for graduate students and parents of undergraduates.

On May 23, the Republican-run House passed legislation, H.R. 1911, that sought to tie student loan interest rates to the 10-year Treasury note plus 2.5 percent.

President Barack Obama has a different proposal, that would let the rate float with less fluctuation.

To contact the reporter on this story: James Rowley in Washington at jarowley@bloomberg.net

To contact the editor responsible for this story: Katherine Rizzo at krizzo5@bloomberg.net

[…]

Why Companies Issue Bonds

When companies need to raise money, issuing bonds is one way to do it. A bond functions like a loan between an investor and a corporation. The investor agrees to give the corporation a specific amount of money for a specific period of time in exchange for periodic interest payments at designated intervals. When the loan reaches its maturity date, the investor’s loan is repaid.

The decision to issue bonds instead of selecting other methods of raising money can be driven by many factors. Comparing the features and benefits of bonds versus other common methods of raising cash provides some insight into why companies often look to bond issuance when they need to raise cash to fund corporate activities.

Bonds Versus Banks
Borrowing from a bank is perhaps the approach that comes most readily to mind for many people who need money. This leads to the question, “Why would a corporation issue bonds instead of just borrowing from a bank?” Like people, companies can borrow from banks, but issuing bonds is often a more attractive proposition. The interest rate companies pay bond investors is often less than the interest rate they would be required to pay to obtain a bank loan. Since the money paid out in interest detracts from corporate profits, and companies are in business to generate profits, minimizing the interest amount that must be paid to borrow money is an important consideration. It is one of the reasons healthy companies that don’t seem to need the money often issue bonds when interest rates are at extremely low levels. The ability to borrow large sums of money at low interest rates gives corporations the ability to invest in growth, infrastructure and other projects.

Issuing bonds also gives companies significantly greater freedom to operate as they see fit – free from the restrictions that are often attached to bank loans. Consider, for example, that lenders often require companies to agree to a variety of limitations, such as not issuing more debt or not making corporate acquisitions, until their loans are repaid in full. Such restrictions can hamper a company’s ability to do business and limit its operational options. Issuing bonds enables companies to raise money with no such strings attached.

Bonds Versus Stock
Issuing stock, which means granting proportional ownership in the firm to investors in exchange for money, is a popular way for corporations to raise money. From a corporate perspective, perhaps the most attractive feature of stock issuance is that the money generated from the sale of stock does not need to be repaid. There are, however, downsides to stock issuance that may make bonds the more attractive proposition.

With bonds, companies that need to raise money can continue to issue new bonds as long as they can find investors willing to act as lenders. The issuance of new bonds has no effect on ownership of the company or how the company is operated. Stock issuance, on the other hand, puts additional stock shares in circulation, which means that future earnings must be shared among a larger pool of investors. This can result in a decrease in earnings per share (EPS), putting less money in owners’ pockets. EPS is also one of the metrics that investors look at when evaluating a firm’s health. A declining EPS number is generally not viewed as a favorable development.

Issuing more shares also means that ownership is now spread across a larger number of investors, which often makes each owner’s share worth less money. Since investors buy stock to make money, diluting the value of their investments is not a favorable outcome. By issuing bonds, companies can avoid this outcome.

More About Bonds
Bond issuance enables corporations to attract a large number of lenders in an efficient manner. Record keeping is simple, because all bondholders get the exact same deal with the same interest rate and maturity date. Companies also benefit from flexibility in the significant variety of bond offerings available to them. A quick look at some of the variations highlights this flexibility.

The basic features of a bond – credit quality and duration – are the principal determinants of a bond’s interest rate. In the bond duration department, companies that need short-term funding can issue bonds that mature in a short time period. Companies that need long-term funding can stretch their loans to 10, 30, 100 years or even more. So-called perpetual bonds have no maturity date, but rather pay interest forever.

Credit quality stems from a combination of the issuing company’s fiscal health and the length of the loan. Better health and short duration generally enable companies to pay less in interest. The reverse is also true, with less fiscally healthy companies and those issuing longer-term debt generally being forced to pay higher interest rates to entice investors into lending money.

Types of Bond Options
One of the more interesting options companies have is whether to offer bonds backed by assets. Bonds that give investors the right to lay claim to the company’s underlying assets, in the event the company is unable to make its promised interest payments or repay its loan, are known as “collateralized” debt. In consumer finance, a car loan or home mortgage are examples of this type of debt. Companies may also issue debt that is not backed by underlying assets. In consumer finance, credit card debt and utility bills are examples of uncollateralized loans. Loans of this type are called “unsecured” debt. Unsecured debt carries a higher risk for investors, so it often pays a higher interest rate than collateralized debt.

Callable bonds are another option. They function like other bonds with the caveat that the issuer can choose to pay them off before the official maturity date. C

Convertible bonds are also a consideration. This type of bond starts off acting just like other bonds, but offers investors the opportunity to convert their holdings into a predetermined number of stock shares. In a perfect scenario, such conversions enable investors to benefit from rising stock prices and give companies a loan they don’t have to repay.

The Bottom Line
For companies, the bond market clearly offers many ways to borrow. From an investor’s perspective, the bond market offers a lot to consider. The variety of choices, ranging from bond types to duration and interest rates, enable investors to select investments closely aligned with personal funding needs. The wide variety of choices also means that investors should do their homework to make sure they understand where they are putting their money, how much it will earn and when they can expect to get it back. For investors unfamiliar with the bond market, financial advisors can provide insight and guidance as well as specific investment recommendations and advice. They can also provide an overview of the risks that come with investing in bonds, such as rising interest rates, call risk and, of course, the chance that a corporate bankruptcy will cost you some or all of the amount you invested.

More From Investopedia

How Exchange Risk Affects Foreign Bonds
[…]

Peru Sees Expansion in Alternative Crops to Coca – UN : Peruvian …

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Peru Sees Expansion in Alternative Crops to Coca – UN

June 28, 2013 by ·

Crops planted to replace illicit coca cultivation in Peru brought in $131 million in 2012, the United Nations Office on Drugs and Crime said Wednesday.

The UN said the revenue from alternative crops has been increasing steadily since 2000, state news agency Andina reported.

Alternative crops include cacao, coffee, and palm oil, among others. Promoting alternative crops is a key strategy in Peru’s policies to curb cocaine production as it provides farmers with an economic alternative to growing coca.

The UN said that 14 business associations have emerged from ex-coca growers, representing some 26,000 families in the country.

The main markets for the alternative crops are Germany, the United States, Belgium, as well as England, Holland, Italy, Canada and Sweden.

Peru is one of the world’s top coca producers. The leaf is the base for making cocaine.

Filed under Agro, Business, Coca/Cocaine, Law & Justice · Tagged with , , , ,

[…]

Bank of Spain urges Spanish lenders to curb cash dividends

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Bank of Spain urges Spanish lenders to curb cash dividends

Friday, 28 June 2013 17:23

Posted by Muhammad Iqbal 19

MADRID: The Bank of Spain on Thursday urged Spanish lenders to limit 2013 cash dividends to the equivalent of 25 percent of annual profit in a move that may force the country’s two largest banks to revise policies.

A central bank spokesman said the recommendation did not apply to scrip dividends, but lenders were asked to take into account the evolution of results and make reasonable adjustments to dividends paid in shares.

In a letter sent to all Spanish lenders, the central bank said they should limit dividends to maintain high levels of capital in an uncertain economic environment.

Last week, in its annual review of the Spanish economy, the International Monetary Fund had already called on Spanish lenders to reinforce the quantity and quality of their capital by being very prudent on cash dividends while cleaning up loan books and quickly selling distressed assets.

The new guidelines will have no impact on most of the banking sector as most lenders stopped paying dividends when Spain sought a 42-billion-euro ($54.6 billion) bailout for its banks, brought low by the bursting of a decade-long property bubble.

However, Spain’s two biggest banks, Santander and BBVA, last year maintained high levels of cash payouts despite taking a massive hit on profit after booking billions of euros in provisions to cover potential losses on real estate investments.

BBVA’s cash dividend was worth about 80 percent of annual profit in 2012, up from about 30 percent in 2011.

Santander’s cash dividend was worth about 50 percent of annual profit in 2012, also up from 20 percent in 2011.

A spokesman for BBVA said it was too early to know if the recommendation would impact the bank’s dividend policy and it would have more visibility as the year progresses.

BBVA’s next cash payment to shareholders is planned to take place in January 2014.

Santander declined to comment. Popular, Sabadell, Caixabank and Bankia have not made any dividend payment so far in 2013.

While Bankia has a ban on dividend payments until 2014 under its EU-agreed restructuring plan, Popular has said it would look at restarting dividend payments in 2013.

Caixabank and Sabadell said they are likely to maintain the same level of payouts to shareholders as in 2012, with the option to choose between cash or shares.

The Bank of Italy issued a recommendation in the first quarter, saying banks that had posted a loss or had a low capital base should not distribute dividends.

As a result, Italian regional lender Banca Carige had to withdraw its dividend plan.

In addition, the European Commission limits dividend payments of bailed-out banks in Europe. In Ireland all lenders suspended dividends at the start of the crisis and have not stated plans to resume them.

Copyright Reuters, 2013Share […]

Car Title Loan Company Opens New Store in Waukegan, IL

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The team at our new TitleMax location is excited and ready to help the residents of Waukegan obtain the short-term cash loans they need.

Waukegan, IL (PRWEB) June 28, 2013

TitleMax, one of the nation’s largest and fastest growing car title loan companies, opened a new location on Thursday, May 30, 2013. Residents can now visit this store for all of their short-term cash needs.

The new store is located at 1801 Belvidere Road, Waukegan, IL 60085. Store hours are Monday – Friday from 9:00 a.m. to 7:00 p.m., and Saturday from 10:00 a.m. to 4:00 p.m. The store can be reached by calling (847) 596-2842.

“The team at our new TitleMax location is excited and ready to help the residents of Waukegan obtain the short-term cash loans they need,” said Otto Bielss, Senior Vice President of Operations for TMX Finance. “We pride ourselves on an exceptional level of customer service in our stores and our newest branch is no different.”

About Car Title Loans

A car title loan is a fast way for credit-challenged individuals to obtain the short-term cash they need. To secure a car title loan with TitleMax in the state of Illinois, an individual must have a clear, or lien-free, car title, a government-issued ID and proof of income. With these items an individual can obtain a loan up to $4,000 while still maintaining the use of their vehicle. No insurance is required, there are no credit checks and most loans can be processed in as little as 30 minutes.

There are more than 55 TitleMax stores in the state of Illinois. To find a TitleMax near you click Title Loan Stores.

About TitleMax

TitleMax, a subsidiary of TMX Finance, provides financial products to people without access to traditional credit alternatives. TitleMax has been a trusted consumer lender for over 14 years, helping hundreds of thousands of people in getting cash when they need it. Since its inception in 1998, TitleMax has grown to over 1,100 stores, spanning 12 states and provides car title loans to over 2,000 people each day.

Please visit http://www.titlemax.com for more information on car title loans and how TitleMax can be of service.


[…]

Payday Loans with Bad Credit: Payday-Loans.org Announces New


Payday Loans with Bad Credit: Payday-Loans.org Announces New Leader

28 Jun, 2013

IRVING, Texas, June 28, 2013 /PRNewswire-iReach/ — E-biz mogul and long-time netpreneur, Johnny Gordon, is set to head Payday-Loans.org, a site providing comparison shopping tools for payday loans with bad credit. Gordon is not a stranger to the online business realm. He has successfully launched and managed numerous Web properties within the loans marketplace and is now set to jettison the success of Payday-Loans.org.

“We are very excited to have Gordon as our CEO. Not only does he offer decades of professional experience, he is truly a visionary when it comes to spotting and forging vendor relationships. In his previous role, he had overhauled a failing loans division and led it to success and we are confident, he is going to accomplish the same magic here as well. Choosing him as our new CEO was a unanimous decision. The board voted 9-0 in favor of Johnny and has established an aggressive growth plan for him,” says Matthew, who is currently the chief operating officer for Payday-Loans.org.

Payday-Loans.org was previous headed by Lisa, who has since moved on to other ventures. Johnny has been involved with the business for over ten years, but primarily in an advisory and board-level leadership capacity. With the new appointment, he is set to take charge of the company’s overall operations and drive it to success.

“I accepted the challenge that the board has asked me to achieve and I am confident that I will work with both borrowers and lenders to achieve goals favorable to both parties. Payday loans with bad credit are an upcoming product that has been overlooked. The board has asked me to drive over 150% revenue growth and double our lender database and lending capacity. I am confident I will be able to outperform both of these benchmarks. At this point of time, I have decided to retain all current employees although some reshuffling and reallocation is possible in order to drive the best operational synergy,” explains Johnny Gordon, the company’s new CEO.

Johnny will be resigning from his board responsibilities in order to devote all his energies to the official role. This will also be necessary to avoid any conflict of interest in the governing infrastructure of the organization.

Payday-Loans.org is a free site where borrowers research, compare, and sign-up for payday loans with bad credit. The site has been in existence for over ten years and has a lender network of hundreds of companies. In order to sign-up for a payday loan, a user simply needs to fill out a short, thirty-second application and provide some basic information about the borrower’s loan-related needs.

The site’s technology then goes on to do the work and matches borrowers with lenders. Borrowers benefit through low interest payday loans and save several hours of research time.

For more information and to request a quote, visit Payday-Loans.org.

Media Contact: Johnny Gordon, Payday Loans Organization Ltd, (818) 533-1996, info@payday-loans.org

News distributed by PR Newswire iReach: https://ireach.prnewswire.com

SOURCE Payday-Loans.org

[…]

Get A Payday Loan Economically! – Pinoy Beatbox

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A payday advance is the best way of meeting your quick cash requirements. These advances are also identified as no security payday loans or no collateral payday loans as in order to get these loans, you do not demand to give a safety deposit or any kind of collateral. Also, your credit history does not make a difference. So, even if you have a negative credit history, you can apply for these loans without having a be concerned. At the very same time, these loans are processed quickly as you do not even require to fax any documents to get the loan, for which reason, these loans are also referred to as faxless payday loans. Even though payday loans provide numerous advantages over other loans, the only limitation is that the charge that you may have to spend is higher. But this in fact depends on the way that you apply for the loan and the lender that you choose. My cousin discovered same day payday loans online by searching the Internet. If you feel and analyze before taking a choice you can cut charges and can make certain that you get a favorable deal for the payday advance. Locating the Correct Lender The most important factor even though getting no fax payday loans is discovering the proper lender. Select a lender who gives competitive prices. Browse here at the link payday loans san diego to discover the reason for this belief. In order to attract buyers, a quantity of lenders waive off the costs for the faxless payday loans. Attempt obtaining a lender who would do so as this would make the loan much much more economical. Also, prior to finalizing the lender for the no safety payday loans, uncover out the charges in case you need a rollover, that is, if you need to have an extension to pay back the payday advance. If you really feel that the lender is not providing you the information that you require, uncover an additional lender. Consider it by means of prior to applying for the payday loan It is, at occasions feasible to foresee that you would be quick of cash in the coming time. Also, you may have a handful of days before you demand the additional money. In these instances, you should wait till the end just before applying for the no fax payday loans. This would assist you in cutting down on the interest that you require to spend and would as a result make the loan a lot more economical for you. Also, because the approach of acquiring the no collateral payday loans is extremely fast, it would not truly be a risk. Calculate the Amount Needed Ahead of you apply for the payday advance, make positive that you compute the precise amount you would demand. Make it a point not to borrow more than you require. This engaging research payday loans dallas linkURLsiteuse withwebsitewikiarticlearticle directoryportfolioencyclopediapaperessayweb page has various stately lessons for the reason for it. In case you do borrow additional money, remember that you would also have to spend added interest. With these simple points in mind and a couple of smart calculations, it is attainable to get the funds that you need and that also, at a cots-powerful price!. My mom discovered payday loan lenders by browsing books in the library.

Get A Payday Loan Economically!

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Henderson woman gets bill for loan she didn’t apply for

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Contact 13

Henderson woman gets bill for loan she didn’t apply for

CREATED Jun. 27, 2013

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A Las Vegas valley woman became a victim when someone took out a payday loan in her name Video by ktnv.com

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Las Vegas, NV (KTNV) — It’s easier than you might think for someone to get cash using your identity. It’s a scam that will leave you holding the bill. Tonight in a Contact 13 consumer alert, a warning from one Henderson woman, who says it happened to her.

“I couldn’t believe it. I was in shock,” says Christine Cummins.

Anyone would be, if they opened a bill like this.

“Holy cow. Someone had taken out a $500 loan under my name. And Rapid Cash wanted $625 dollars back,” says Christine.

She says she never applied for this online payday loan. But back in April, someone using her social security number did. So she went to a Rapid Cash location to find out what was going on.

But she was in for an even bigger surprise when they printed up this contract. It turns out, this loan came with an annual percentage rate of more than 536%.

“So of course I was extremely upset,” says Christine.

She says customer service also told her, the money had been deposited into an account in New York.

“I said you guys gave money to someone that’s not me, and put it in a bank account that’s not even in Nevada,” says Christine.

So she reached out to Contact 13 for answers. We learned the Rapid Cash website lists the requirements for getting a loan, which includes proof of income. Christine showed Contact 13 a copy of the pay stub she says was used to apply for the loan. It says she works at Fine Steaks and Salads on Anthem Village Drive, near Eastern.

But there’s two problems with that: first as you can see, that restaurant doesn’t exist any more. According to the city of Henderson, the business license expired back in 2008. Second, Christine actually works for the Clark County School District.

“I have never worked there. I have never eaten there,” says Christine.

So we wondered, did Rapid Cash verify Christine’s place of employment? Rapid Cash says it does, but privacy laws prevented them from talking to Contact 13 specifically about what happened in Christine’s case.

Here’s the other problem, we learned customers are only required to show ID when they apply for a loan at a store. Online applicants don’t have to provide ID. Instead, Rapid Cash says it identifies customers by verifying your name, social security number, birthday and other personal information.

“All they needed was, some how they got my social security number, but all they provided was a fake pay stub and that’s all they needed,” says Christine.

The worst part is, it can happen so quickly, it’s hard to stop. Rapid Cash says when a loan is approved online, the customer can have that money in their account the very next business day.

The company says it takes a number of steps to help prevent identity fraud. But they admit it happens, and they work closely with law enforcement to stop it. So Christine filed this police report, hoping an investigation might clear her name. But that’s not all.

“My main concern is that interest rate,” says Christine.

Remember that 536% number?

“I don’t think anyone should be a victim of that high of an interest rate,” says Christine.

Rapid Cash says even though it’s labeled as an annual percentage rate, these are meant to be short-term loans. So as long as a customer pays it off within 14 days, the company argues their rates are actually reasonable. Christine doesn’t see it that way.

“I think it’s highway robbery,” says Christine.

While the rate does seem high, Dan Wulz with the Legal Aid Center of Southern Nevada says it’s legal.

“The interest rate is unregulated. They can charge whatever interest rate they can get a customer to agree to in the loan contract,” says Dan.

As for Christine, things are just getting worse. After our interview, she got another bill, this time for more than $500, for a loan with a different company, that she never applied for. The good news is, Christine is done dealing with Rapid Cash. After Contact 13 reached out to the company, she got this letter, letting her know her loan was found to be fraudulent and she doesn’t have to pay it back.

“In my opinion they’re out $500, and they really made me angry,” says Christine.

So here’s the Contact 13 bottom line. If you’re the victim of fraud, make sure you file a police report. We spoke with Henderson Police who are investigating this case. They stress it’s extremely important to report this sort of crime, otherwise identity thieves continue to get away with it.

Also be sure to protect yourself just like Christine did, by putting an alert on your credit report. And if you’re the victim of ID theft, remember we’ve got your back Las Vegas. Email us at 13investigates@ktnv.com, and we’ll see what we can do to help.

[…]

China Bad-Loan Alarm Sounded by Record Bank Spread Jump

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Borrowing costs for Chinese banks have surged the most in at least six years this month as rating companies say a cash crunch threatens to swell bad loans.

The yield spread for one-year AAA bank bonds over similar-maturity sovereign notes jumped 56 basis points so far this month to 163 basis points, the most in ChinaBond records going back to 2007. The similar AA gap widened 59 basis points to 188. Even as China Construction Bank Corp. (939) President Zhang Jianguo said yesterday cash conditions have normalized, the benchmark seven-day repurchase rate was fixed at 6.85 percent, almost twice the 3.84 percent average for this year.

Money-market rates touched the highest level last week since at least 2003, prompting three of the largest rating agencies to warn banks may run out of cash to pay investors in their wealth management products and to extend new loans, increasing the risk their customers will default. The People’s Bank of China is seeking to wring speculative lending out of the system after total credit approached 200 percent of gross domestic product, according to Fitch Ratings.

“There could be unintended consequences from the central bank’s approach,” said Liao Qiang, a Beijing-based director at Standard & Poor’s. “We expect some deleveraging at banks’ interbank and wealth management businesses to unfold. Credit growth would slow. This could pressure banks’ asset quality.”

Swaps, Bonds

The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repurchase rate, touched an all-time high of 5.06 percent on June 20, according to data compiled by Bloomberg. The one-day repo rate surged to a record 12.85 percent the same day, according to a daily fixing announced by the National Interbank Funding Center.

The yield on 10-year government bonds rose 13 basis points to 3.60 percent last week, while the one-year borrowing cost jumped 51 basis points to 3.61 percent, inverting the so-called yield curve for the first time in ChinaBond data going back to 2007. The 2023 yield closed at 3.53 percent yesterday.

Bad loans at banks including Industrial & Commercial Bank of China Ltd. have increased for six straight quarters through March 31, the longest streak in at least nine years.

Chinese commercial banks’ outstanding non-performing loans rose 20 percent to 526.5 billion yuan ($86 billion) at the end of the first quarter from a year earlier, accounting for 0.96 percent of total lending, according to data from the China Banking Regulatory Commission.

Those figures don’t reflect the real amount of debt because of the ways banks move loans off their books, Charlene Chu, Fitch’s Beijing-based head of China financial institutions, said in April. Some loans are bundled and sold to savers as wealth-management products, which pay more than regulated deposits, she said. Other assets are sold to non-bank institutions, including trusts, to lower bad-debt levels.

Increasing Risk

Non-performing loans may rise faster as weaker borrowers have difficulty refinancing credit in the coming months, Moody’s Investors Service warned on June 24. The official Xinhua News Agency said in a June 23 analysis that risk is increasing in the financial system as the shadow-banking sector expands and institutions make more highly leveraged investments.

Shadow lending flourishes in China because an estimated 97 percent of the nation’s 42 million small businesses can’t get bank loans, according to Citic Securities Co., and savers are seeking higher returns. The industry may be valued at 36 trillion yuan, or 69 percent of gross domestic product, JPMorgan Chase & Co. estimated last month. The crackdown may damage the economy by shrinking funding for smaller companies, Barclays Plc said on May 20.

Wealth Management

The nation’s outstanding amount of wealth-management products rose by 500 billion yuan to 13 trillion yuan in the first five months of this year, accounting for 16 percent of the nation’s deposits, according to estimates published by Fitch on June 10. That compares with a 4 trillion yuan increase for the whole of 2012.

An estimated 1.5 trillion yuan of wealth management products were to mature in the last 10 days of this month, Fitch Ratings said June 21. Issuance of new products and borrowing from the interbank market are among the common sources of repayment for maturing products, it said.

Fallout from unofficial lending led more than 80 businessmen to commit suicide or declare bankruptcy over six months in 2011-2012 in the southeastern exporting hub of Wenzhou, a city of 9 million residents whose 400,000 small businesses make products ranging from cigarette lighters to eyeglasses.

Disorderly Unwinding

“The problem is that when debt levels have got so high, and it’s more debt that keeps the existing debt afloat, you absolutely have to stop the process, but it’s very difficult to do so in an orderly way,” said Michael Pettis, a finance professor at Peking University “There’s always a risk that the unwinding of the debt becomes disorderly and the PBOC will be blamed for mismanaging the process.”

About 563 new wealth products were issued last week, two-thirds more than the previous period, according to Benefit Wealth, a Chengdu-based consulting firm that tracks the data. China Minsheng Banking Corp., the nation’s first privately owned lender, is marketing a 35-day product that offers an annualized yield of 7 percent. China’s one-year benchmark deposit rate is 3 percent.

Mid-sized banks get an average of 20 percent to 30 percent of their funds from such products, according to Fitch, which didn’t name specific lenders. That makes these banks more susceptible to default risks on the products.

New Curbs

The China Banking Regulatory Commission told banks in March to cap investments of client money in debt that isn’t publicly traded at 35 percent of all funds raised from the sale of wealth management products. The next steps may include tightening that sends some smaller financial institutions into bankruptcy, according to analysts at Nomura Holdings Inc.

“What we will see over the next half year is credit growth overall will slow down a bit,” Stephen Green, head of Greater China research at Standard Chartered Plc, said in a Bloomberg TV interview from Shanghai. “If interbank rates remain quite volatile and at high levels, then that’s obviously going to have a bigger feed through to credit.”

The PBOC’s decision to refrain from pumping “hefty” sums into the financial system last week was a “bold but essential move to discipline unchecked lenders,” Xinhua said in a June 26 commentary, adding that the pain is needed to pave the way for a more sustainable economy.

Proactive Attitude

China Construction Bank president Zhang welcomed what he called the PBOC’s “proactive attitude” to a changing market situation.

“China Construction Bank hasn’t stopped new lending in any sort of period, or to any sort of clients,” Zhang said at the opening of a bank branch in Taipei yesterday. “Recently there was a temporary liquidity squeeze condition, but CCB’s cash is so adequate that we were able to lend money to our peers. The cash shortage condition has eased in the last two days, and by now the situation has already normalized.”

The central bank, which was silent during the worst of the cash crunch, published a statement on June 24 saying there’s a reasonable amount of liquidity in the financial system and that banks should control risks from credit expansion, including those associated with maturity mismatches.

Maintain Stability

The PBOC will use all kinds of tools to appropriately adjust liquidity in the market and maintain the overall stability, Governor Zhou Xiaochuan said at a forum in Shanghai today. China will continue to implement a prudent monetary policy and allow more foreign participation in the interbank money, foreign-exchange and bond markets, he said.

“No policy maker can afford to be blamed for being responsible for an unnecessary, fully-avoidable financial meltdown and growth hard landing,” Bank of America Merrill Lynch economists wrote in a report yesterday. “With a month of mess in the interbank liquidity, it’s time to re-highlight stability and it’s time for markets to calm down.”

The cost of protecting China’s government debt from default slipped five basis points in New York to 116 yesterday and is up 29 basis points this month, according to prices from data provider CMA. The contracts pay the buyer face value in exchange for underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements. The contract on Bank of China Ltd. (3988) dropped 28 basis points to 165 yesterday and is 51 basis points higher for June.

“Smaller banks short of deposits will face significant pressure from liquidity management,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. (ANZ) “If the weakest link breaks, there’s an increase in the likelihood of creating systemic risks.”

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; James Regan at jregan19@bloomberg.net

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Bad-Loan Alarm Sounded by Record Bank Spread Jump

Tomohiro Ohsumi/Bloomberg

Bad loans at banks including Industrial & Commercial Bank of China Ltd. have increased for six straight quarters through March 31, the longest streak in at least nine years.

Bad loans at banks including Industrial & Commercial Bank of China Ltd. have increased for six straight quarters through March 31, the longest streak in at least nine years. Photographer: Tomohiro Ohsumi/Bloomberg

10:56

June 28 (Bloomberg) — Ron Gould, managing director at Promontory Financial Group LLC talks about China’s economy, financial system and central bank monetary policy. Chinese central bank Governor Zhou Xiaochuan said the nation will maintain market stability and adjust policies at the right time, his first comments since a record cash squeeze hit the world’s second-largest economy. Gould speaks with Angie Lau and Rishaad Salamat on Bloomberg Television’s “Asia Edge.” (Source: Bloomberg)

4:41

June 26 (Bloomberg) — Michael Shaoul, chairman of Marketfield Asset Management in New York, talks about China’s banking industry and central bank monetary policy. Shaoul also discusses the prospects for the U.S. economy, stocks and Federal Reserve policy. He speaks with Zeb Eckert on Bloomberg Television’s “First Up.” (Source: Bloomberg)

4:37

June 26 (Bloomberg) — Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong, talks about People’s Bank of China monetary policy and its implications for the nation’s credit market. China’s central bank said it will use tools to safeguard stability in money markets and tight liquidity is set to ease, giving the first official signs of relief for a cash squeeze in the world’s second-largest economy. Green speaks from Shanghai with Zeb Eckert on Bloomberg Television’s “First Up.” (Source: Bloomberg)

[…]

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