Will President Xi Be Able To 'Make China Great Again'? 1

Minsheng and Anbang fall prey to the Xi’s regulatory crackdown on banks in China

China Minsheng Bank (CGMBF) (CMAKY) was recently in the news for a $240 million fraud affecting nearly 150 customers.

The bank had been selling unauthorized wealth-management products (or WMPs) to these customers. Consequent to a regulatory crackdown by the China Banking Regulatory Commission on shadow banking products and interbank lending, four of the Minsheng Bank’s branches were fined and the bank was penalized for “ineffective internal risk control and violation of prudent operations.”

The Chinese regulator has also charged Anbang Insurance Group, a leader among insurers in the sale of WMPs, for the improper sale of two investment products. The Chinese insurer is heavily invested in real estate overseas, including the Waldorf Astoria in the US (IYR) (VNQ).

Can Xi ‘Make China Great Again’?

The recent crackdown on Chinese banks (ACGBY) (BACHY) (CICHY) (CVBHY) (CIHKY) (IDCBY) is part of President XI’s broader mission to ‘Make China Great Again’ as phrased by Kyle Bass over a Bloomberg interview recently. Xi, who sees financial security as the foundation of a stable economy, seeks to reduce financial risk in China (YANG) (FXP) (CHAD). Xi believes it to be strategically important for the country’s economic and social development.

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Kyle Bass identified a key risk

However, Bass believes, “you cannot grow M2 at 12-13% when M0 is declining.” As you can see in the chart above, so far in 2017, M0 or narrow money (which includes coins and notes in circulation and other money equivalents that are easily convertible into cash) has been declining. At the same time, M2 (which includes M1 plus short-term time deposits in banks and 24-hour money market funds) has been rising at its regular (rather rapid) pace. This is a good indicator of the risk inherent in China’s (FXI) (YINN) financial system.

Bass went on to identify a key indicator that investors should watch out for, given the risk in China’s financial system. We look at this in the next article of this series.

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