Chinese Bubble About To Burst ?

[Count Bobulescu]

Minxin Pei in the Diplomat.

Are Chinese Banks Hiding “The Mother of All Debt Bombs”?

Financial collapses may have different immediate triggers, but they all originate from the same cause: an explosion of credit. This iron law of financial calamity should make us very worried about the consequences of easy credit in China in recent years. From the beginning of 2009 to the end of June this year, Chinese banks have issued roughly 35 trillion yuan ($5.4 trillion) in new loans, equal to 73 percent of China's GDP in 2011. About two-thirds of these loans were made in 2009 and 2010, as part of Beijing's stimulus package. Unlike deficit-financed stimulus packages in the West, China's colossal stimulus package of 2009 was funded mainly by bank credit (at least 60 percent, to be exact), not government borrowing.

If 10 percent of these loans turn bad, a very conservative estimate, we are talking about total bad loans in the range of 1 to 1.4 trillion yuan. If the share of dud loans should reach 20 percent, a far more likely scenario, Chinese banks would have to write down 2 to 2.8 trillion yuan, a move sure to destroy their balance sheets.

http://thediplomat.com/2012/09/07/ar...ll-debt-bombs/

[gerard25]

Minxin Pei in the Diplomat.

Are Chinese Banks Hiding “The Mother of All Debt Bombs”?






thediplomat.com/2012/09/07/are-chinese-banks-hiding-the-mother-of-all-debt-bombs/

Flooding the economy with trillions of yuan in new loans did accomplish the principal objective of the Chinese government — maintaining high economic growth in the midst of a global recession.

So what happens next? How long is this growth sustainable? or what if these loans are really creating a positive economic cycle resulting in real long term growth?

[C. Flower]

Important points made by Joseph Stiglitz - even if China never cashes in its US bonds, it is still better off for the relationship -

[ame="http://www.youtube.com/watch?v=Z9uw8gJhKyA"]Stiglitz: China better off even if the U.S. says 'Sorry, those bonds that you own are worthless.' - YouTube[/ame]

David Graeber agrees -

David Graeber:
Actually, most of those countries that own all those T-bonds know they are losing money by sitting on them (the yields are less than inflation), and they'll never get all their money back. But most of them -- Japan, South Korea, the Gulf States -- are regimes under US military protection, in fact, with huge US military bases sitting right on top of them, so really we're talking about protection money—in whatever sense of the term.

Obviously, China is a different story. Their behavior is a little harder to explain, since they are effectively shipping enormous amounts of consumer goods to us on credit and must know they're never going to get paid back. But here I think you have to remember two things. First, China has two thousand years of experience flooding potential rival powers with riches, so as to make them spoiled and dependent. If it worked on the steppe nomads, why not the US- which they probably see as just as scary, violent barbarians?

Second, the Chinese leadership might be running a quasi-capitalist state but these guys were all trained as Marxists. They probably still see all this high finance as so much mumbo jumbo -- "ideological superstructure" as the Marxists like to put it -- it isn't really real.

What's real is highways, factories, and technology. And they are getting more and more of that, and we're getting less. So they're perfectly happy with arrangements as they stand.

I suspect there's a kind of tacit deal, here, whether explicitly stated or not: the Chinese government periodically pretends to get all worked up over the US debt, even though they don't care, and in exchange, the US only pretends to get worked up over their constant pirating of intellectual property rights and technology transfers, but in fact, lets them get away with it. The result: we get Walmart, and they get nanotechnology, superfast trains, and a space program. So what do they care if we never "pay the debt?"

http://inthearena.blogs.cnn.com/2011/07/05/david-graeber-studied-5000-years-o...

[Count Bobulescu]

So what happens next? How long is this growth sustainable? or what if these loans are really creating a positive economic cycle resulting in real long term growth?

I have yet to see anyone make the case that these infrastructure investment projects, while good in the short term, and obviously needed. are a long term solution to China’s needs. Rather, the analogy is more often that they are like a housing boom (which many Chinese cities also have), and like housing will eventually crash with lots of unpleasant consequences. It’s not that China doesn’t need, or shouldn’t have all this new investment, it’s that it is being financed in a manner unorthodox by international standards that gives rise to concern

[Count Bobulescu]

The man expected to take over China's presidency hasn't been heard from in nine days, and with no official explanation for his absence, the state is making some bizarre attempts to downplay his disappearance. Meanwhile, the Chinese Internet is rife with rumors about what happened to Vice President Xi Jinping, ranging form a soccer injury to a car crash. Last week, Xi broke off appointments with U.S. Secretary of State Hillary Clinton, Singapore Prime Minister Lee Hsien Loong, and a Russian diplomatic delegation last week, according to the Financial Times' Jamil Anderlini, and he was a no-show Monday for a meeting with Danish Prime Minister Helle Thorning-Schmidt. The Telegraph's Malcolm Moore notes that this latest absence isn't without precedent, writing, "he had been absent for another six-day period between August 22 and 29." But the latest absence is already longer, and comes a month before the expected Communist Party congress at which Xi is due to take over leadership from President Hu Jintao. No date has been set for that, but the last one took place in October.

http://www.theatlanticwire.com/globa...missing/56691/


Gerard Lemos in The New York Times on the anxiety of the Chinese. Lemos has been trying to figure out what ordinary Chinese people think by putting up "wish trees" for people to tie up their wishes and worries. His findings: from adults worried about income and health care to schoolboys concerned about finding a wife, "people had lost their optimism and were yearning for security and freedom from anxiety."

http://www.nytimes.com/2012/09/10/op...pagewanted=all

[Count Bobulescu]

In 2011, as China's seemly unstoppable economy began to sputter, the subway boom turned bust. In early January 2012, Caixin quoted Zhang Jiangyu, vice director for the powerful National Development and Reform Commission's transit technology planning office, as saying that 70 to 80 percent of China's planned rapid transit lines are being "postponed."

And last month, the other shoe dropped: China's subways are insolvent.

Ying Minghong, chairman of the company that owns Shanghai's fast-growing Metro, told China Daily that of the city's 11 lines, only one makes anything resembling an operating profit.

And that's just on paper. Yang Di, a manager at Shanghai Metro's parent company, told China Daily that only what he termed "optimal resources" were officially counted on balance sheets. Referring to the tangled web of ownership and operations of Shanghai Metro, he said that "it is impossible to know the exact scale of their losses."

http://www.theatlanticcities.com/com...ent-bust/3207/

[C. Flower]

http://www.theatlanticcities.com/com...ent-bust/3207/

The same thing happened with the British Railway system. Some of it took fifty years to go into profit. Then it was nationalised

[Count Bobulescu]

The same thing happened with the British Railway system. Some of it took fifty years to go into profit. Then it was nationalised

Problem is, losses were never anticipated in the Chinese plan. As the piece points out their model was based on the Japanese, Hong Kong, and Singapore systems which all make a profit and unlike the western models run without subsidy.

[Count Bobulescu]

BEIJING—Speculation gathered steam about the health and whereabouts of the man expected to take the reins as China's top leader in a matter of weeks as Chinese authorities keep their usual tight grip on information about the nation's leaders.

Xi Jinping hasn't been seen since Sept. 1, raising questions about the whereabouts and health of the presumed next president of China. Jeremy Page has more. Photo: AP
Monday, Chinese authorities failed to explain why Vice President Xi Jinping, who hasn't been seen in public since Sept. 1, had missed another meeting with a visiting foreign dignitary, Denmark's prime minister.
Rumors that all wasn't well with 59-year-old Mr. Xi were sparked last week when he skipped a meeting with visiting U.S. Secretary of State Hillary Clinton at the last minute. The government declined to provide a clear explanation for that highly unusual move.
The mystery adds to an already tense atmosphere ahead of once-a-decade leadership transition expected to kick into gear in a few weeks. President Hu Jintao is due to hand over to Mr. Xi his most powerful post, as Communist Party chief.
Despite government efforts to crack down on online commentary, Mr. Xi was the subject of speculation on fast-moving microblogs, which work like Twitter.
"Jinping, what's the deal?" read one post on Sina Corp.'s popular Weibo microblogging service, which used Mr. Xi's given name and had been left untouched by censors Monday evening. "The entire country from top to bottom is paying attention."

As is often the case with China's top leaders, Chinese and English language searches for Mr. Xi's full name and surname were blocked on Weibo on Monday. But searches for "Jinping" weren't blocked in Chinese, though periodic searches using those characters produced fewer results each time, suggesting censors were busy deleting posts about Mr. Xi.

http://online.wsj.com/article/SB1000...141787056.html

[Yojimbo]

A couple of articles here on the issue (among other things) of Chinas rapid loss in cost advantages in manufacturing:

http://www.nakedcapitalism.com/2012/...ling-myth.html

And yes, I know its the Telegraph, but Ambrose Edwards-Pritchard is usually quite an astute commentator:

http://www.telegraph.co.uk/finance/c...sy-Growth.html

We do seem to be reaching a tipping point where a combination of rising costs in China, and lowering labour/energy costs in parts of the west, plus competition from other developing countries means that locating manufacturing in China is no longer a 'no-brainer'. Things might in fact be changing very rapidly.

It also now seems to be acknowledged that there is the mother of all capital outflows going on now from China as the rich cash in and try to get out. This could completely overwhelm the alleged cushion of China's capital reserves in protecting itself from a major reversal.

[Yojimbo]

And the bad news for Australia, Peru and Chile:

http://www.mpettis.com/2012/09/16/by...ave-collapsed/

Pettis is predicting a major commodity crash due to a massive drop in demand from China. There are huge stockpiles of commodities and finished products in China, its very difficult to anticipate what the impact of this will be, although it does seem that if you want to buy a cheap washing machine, China is the place to be now.

[DCon]

There are huge stockpiles of commodities in China

allegedly

Chinese banks and companies looking to seize steel pledged as collateral by firms that have defaulted on loans are making an uncomfortable discovery: the metal was never in the warehouses in the first place.

This means that in an economy in which the creation of liabilities, and pledging of assets took place at a furious pace in the past 5 years, nobody really knows just what the real state of credit creation truly was. What is 100% certain is that as a result of this revelation, the GDP number of the country, which is and always has been a derivative of credit formation and expansion (and heaven forbid contraction), is massively overrepresenting what it is in reality, and that the Chinese economy has been expanding at a far slower pace if defined not only by the creation of liabilities, but by matched assets. Most importantly, it means that every single Renminbi in circulation is impaired as a country-wide liquidation event would see huge losses by every creditor class. It also would mean, naturally, zero residual value left for the equity.

And just like that the Chinese growth "miracle" goes poof... as does its steel first, and soon all other commodities (coughcoppercough) that served as the basis of "secured" liability creation.

Banks, too, are giving less credit against warehouse receipts.



"Fake warehouse receipts have become a problem for some banks and because of this, many banks have boosted monitoring of existing stocks at warehouses and temporarily stopped accepting steel stocks as collateral for loans," said a Shanghai-based branch manager from a Chinese bank who declined to be identified as he was not authorized to speak to the media.



Steel mills and end users rely heavily on trading firms to keep steel flowing from producers to consumers. Steel traders often buy consignments with full payment, ensuring cash flow to the mills. End users can buy small volumes from the traders, more convenient for them than the big volumes the mills sell.



Industry sources estimated cases that have already come to light account for about 5 billion yuan ($787.50 million) of bad debt in Shanghai, one of China's biggest steel trading centers.



At another warehouse, a logistics unit of giant steelmaker Baosteel rented a small office to a company called Shanghai Yiye Steel Trade Market Management Co Ltd. Documents were forged stating Yiye was the owner of some of the steel stored in the warehouse, said Wang Xueying, the spokeswoman for the unit called Shanghai Baosteel Logistics Co Ltd.



Yiye used the documents in dealings with two companies, China Railway Harbin Logistics and Wuhan Iron Yitong, the spokeswoman said.



The two companies came to the warehouse to collect the stocks only to find that Yiye did not own the materials, she said. The case is still under investigation, she added.



Nobody answered telephone calls to Yiye made by Reuters to request comment for this story. Both China Railway Harbin Logistics and Wuhan Iron Yitong declined to comment when contacted.

http://www.zerohedge.com/news/how-ch...-world-economy

[Yojimbo]

Expats may be starting to leave China (I wonder if this includes Treasury Holdings). It is, as the writer points out, a lagging indicator.

http://www.nakedcapitalism.com/2012/...to-decamp.html

And a wider perspective of the China-Japan conflict over those islands:

http://blogs.telegraph.co.uk/finance...r-crisis-1911/

Its interesting as like many people I've assumed that China's motive is primarily domestic, but Evans-Pritchard does make a good case that this is part of ongoing 'prodding' by China to see how the US reacts. Ultimately, Japan will not make a military move without the support of the US and China knows this.

[DCon]

If the one part of the Globe that was growing, isn't growing - what then?

zerohedge ‏@zerohedge

China's Delinquent Loans Rise 333% Since End 2011 http://tinyurl.com/ccl4w5f
Expand


7h zerohedge zerohedge ‏@zerohedge

Pop goes the Chinese bubble: CHINA TOP 10 LISTED BANKS' OVERDUE LOANS REACH 489B YUAN END-1H, RISE FROM 112.9B YUAN END-2011: PWC

https://twitter.com/zerohedge


Maybe Treasury Holdings and FF retirees can advise China in setting up a NAMA?

[Captain Con O'Sullivan]

Fascinating stuff but so hard to get one's head around in terms of both culture and dare I say the inscrutability of Chinese economic policy.

Every time I begin to be convinced that there will be a crash in Chinese economic affairs I see something else that makes me hesitate- the Chinese are the only government I can think of that can and does deliberately take the steam out of their borrowing and housing bubble apparently at will.

It is just such an alien culture and the evidence for a boom and bust economic cycle is so finely balanced with a perception on the other side that the Chinese government are coaxing their economy along to a level westerners and western governments can't conceive of that I just cannot make up my mind what I think will happen there.

Also there is a load of White Republican noise across the western nets forecasting doom and gloom for China simply because China is now the visible counterforce to US global interests that the room for analysis is very limited.

I know that regionally there are large borrowings, I hear that there are massive empty infrastructure projects in China more or less mothballed but something tells me that those in charge of running the Chinese economy have many more options available to them in terms of inflicting hardship for the 'greater good' that we seriously have issues in the west trying to analyse China.

Perplexing. At one time Russia was the riddle inside a conundrum wrapped up in an enigma- that is clearly now China.

As a westerner I can try to comprehend the Chinese domestic and foreign economic policy but the only thing I know and must admit is that I just don't know enough to be able to make even an informed guess.