Here Comes The Real Stress: Only 27% Of China Project Loans To Be Repaid In Full

Tyler Durden's picture

And now, for today's real news: "Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator. Only 27 percent of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded, the person said. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year." Got China CDS? Because this is the point where one follows Hugh Hendry's advice about that whole panic thing.

From Bloomberg

Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator.

About half of all loans need to be serviced by secondary sources including guarantors because the ventures can’t generate sufficient revenue, the person said, declining to be identified because the information is confidential. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year, the person said.

Commission Chairman Liu Mingkang said this week borrowing by the so-called local government financing vehicles may threaten the banking industry. The nation’s five-largest banks, including Agricultural Bank of China Ltd., plan to raise as much as $53.5 billion to replenish capital after the sector extended a record $1.4 trillion in credit last year.

Local governments set up the financing vehicles to fund projects such as highways and airports due to limits on their ability to directly borrow money. The central government this year restricted borrowing on concern money isn’t being used for viable projects.

Only 27 percent of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded, the person said.

Calls to the banking regulator’s press office in Beijing after business hours weren’t unanswered.

Ensure Repayment

China last month ordered local governments to ensure repayment and to concentrate on completing projects already under way. Financing units that fund only public projects and rely on the fiscal income of local governments to repay debt should stop spending, the State Council said June 13. Local governments have also been barred from guaranteeing loans taken by their financing vehicles.

To minimize losses during this reform, the banking regulator has ordered lenders to create teams to discuss loan repayments with local governments and protect the rights of creditors, the person said.

Chairman Liu said in April that inspectors would visit banks in the third quarter to check on loan reports that had to be submitted by the end of June. Those reports showed the banks had 7.7 trillion yuan of outstanding loans to the local financing vehicles at the end of last month, the person said.

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Commander Cody's picture

Seems like the yuan does not beg for appreciation after all.

lizzy36's picture

Isn`t the whole economic system based on debt that can`t be paid back, merely serviced and continually rolled over?

Cognitive Dissonance's picture

Yup, China has learned well from the kings of the global Ponzi, the good old US of A, with a little help from the original Ponzi gods, old European money which controls all global Central Banks.

Sort of fits the popular myth in America that Asian students are smarter quicker students than their lazy American counterparts. 

ozziindaus's picture

No kidding. China has no one to blame but their own gullible selves for trusting the kings of Ponz.

Myths:

All Chinese know Karate-NO

All Chinese are good at math-NO

China is the economic engine of the world-Fuck NO

Chinese are prudent, honest businessmen-Shiiiit fool.

 

reader2010's picture

+100

You won't hear the ugly facts from CNBC or WSJ.  Why the Chinese banks need constantly to go to equity market to raise capital?  Because they have been saddled with tons of non-performing loans that the Central State commanded. Remember the bad loans in billions of dollars that they loaned to SOEs in the 80s and 90s?  The Central State's solution has been ever expanding the monetary base. For the past 20+ years, the Chinese monetary base has been enlarged more than 30 times quitely.

Durandal's picture

Got to love Government Intervention.

outamyeffinway's picture

China creates their own dilemma and crashes the market. Oh nooooo, what do we do now? Let's sell our T-bills to cover this tragedy. Sorry US, we have no choice!

Steak's picture

ohhhhhhh canadaaaaaaaaaa heres a playlist for this agonizingly rediculous friday: http://www.youtube.com/view_play_list?p=5E7FB2A12195500D

some favorites from my lil sets, so most should be familiar :)

Cognitive Dissonance's picture

Ya know Steak, you're rapidly picking up where Marla left off with regard to spinning those tunes. I saved your last one as well. Thanks.

Steak's picture

i think i'll be able to swing a playlist most fridays.  musiq is something that brings more life, dare i say a heartbeat, to this lil ecosystem tyler created.  party on sir...party on :D

rapunzel's picture

D O N E,

medium rare, thank you very much, ZH‡

vxpatel's picture

What else could it be based upon? We've created a system of perpetual wage slaves happily living drone like existences to pay for the pleasure of their xbox, coca cola, and brittany spears fix...

 

No need to wake up, just make minimum payments, month to month...

Bolor's picture

Land is the main collateral for these UDIC loans. As the anti-property bubble measures start having an effect on land prices these estimates might well prove too optimistic

God's picture

The national communist party owns the land, the banks get money from the national communist party to lend to the local government projects.

The local gov buys the land from the national gov paying for it with money from the national gov. Circle jerk much?

God's picture

So. Does the inflation argument make sense to you now?

SheepDog-One's picture

Deflation of what you own, inflation of what you need to buy.

suckapump's picture

I think the aneurysm in the the right hemisphere of my brain just exploded.

pocomotion's picture

He who play in Chinese house of cards need jokers wild.

virgilcaine's picture

Bring on the stress.

ejmoosa's picture

The Chinese Miracle that wasn't.

Cheeky Bastard's picture

Now you see the reason why CDS market is being favored so highly by China. Massive hedge on under-performance. Risk-neutral economy. And they can restrict buying/selling to foreign entities or just buying/selling on selected reference entities to foreign entities. CCP is a sure thing; probably a cartel of top 5 banks + PBoC. 

ozziindaus's picture

Can you take a CDS out on the issuer of the CDS? I hardly find it likely the Insurance companies/banks issueing such policies in China will pay up. Hell No! If AIG stuck it back to the tax payer, what would a Chinese insurance company do?

PS. It's obvious I don't know who issues the OTC CDS's in China.

dan22's picture

 Understanding China’s Shadow Banking System

The five steps of a fake housing sale in China

1. Before the construction, loan shark operators provide initial finance to small or middle size developers in 2 and 3 tier cities in order to begin the construction.

2. After the construction is complete, and before the official sale to the public begins, loan shark operators will provide resident IDs and other fake documents for mortgage application to real estate developers and make together a fake sale contract.

3. The real estate developer brings the fake contracts to the bank in order to obtain a loan. That can explain why in China, many houses already get sold before they are opened to the public for sale, and why there are so many vacant houses already sold, which no one lives in. (According to the report by Fitch, that was mentioned above there are 64 million unoccupied homes in China)

4. A secret agreement is made between the shark loan operator and the real estate developer. The shark loan operator will get more bank loans through this fake sale, as will the real estate developer. They will use the bank loan in order to engage in another ponzi scheme.

4. The real estate developer shark loan operator will hire people to fake sale frenzy in order to attract real buyers, and if there are enough sales the fake contract will be cancelled out.

5. During the time of the real estate bubble frenzy these ponzi schemes and fake sales were mostly covered, since real buyers could be found. But when the market slows down there will be a thin transaction volume, and the fake sales will be exposed. Then the real collapse will happen.
Understanding China’s Shadow Banking System

scratch_and_sniff's picture

They probably had a good idea most of these loans were never going to be repaid anyway. Besides, what else are they going to spend it on?

Cognitive Dissonance's picture

"spend it"

Spend what? The only purpose of debt is to create more debt.

scratch_and_sniff's picture

I think i read somewhere that their budget surplus was a few trillion yuan...i suppose they could take it out of that if they are really stuck for a few quid.

jmoney's picture

surprised market is not reacting to this. would seem to be a tail event should it actually play out.

Justaman's picture

At least China isn't hiding anything?!?

dan22's picture

Former Microsoft CEO in China is Under Investigation for Shark Loan Activities and Faking Commercial Real Estate Contracts.

amazing story of former Microsoft China CEO, Jun Tang.

He became famous recently due to the exposure of his purchase of a fake PHD diploma from Western Pacific University. He also claimed to have a PHD degree from California Institute of Technology in his Bio and numerous occasions. There is a hot debate on the Chinese web regarding Mr. Tang, who used to be a role model, and is now exposed to be a crook. On the other hand, in the fake goods capital of the world someone line Mr. Tang may as well be a role model. According to the report, Mr. Tang is under police investigation for an alleged criminal corporation with real estate developers in Suzhou City. The police suspect that they faked a commercial real estate sale contract, which enabled him to receive a 112.8 million Yuan mortgage loan from a bank. Later, the loan has been lent out by the real estate developers and to loan sharks.

 Former Microsoft CEO in China is Under Investigation for Shark Loan Activities and Faking Commercial Real Estate Contracts. 

the not so mighty maximiza's picture

This is green shoot bullish stuff.  There is more money to spend by its citizens for domestic China consumption since they are not paying back their own debts.  Banks covered by China's commie goverment so no worries.  Adapt or die to new reality.   China will consume! 

Rusty_Shackleford's picture

"We need more Calgon!"

"Ancient Chinese secret, huh?"

Bam_Man's picture

Showing your age if you remember that one.

doublethink's picture

"To Get Rich Is Glorious."

Or so Deng Xiaoping declared in Shenzhen back in 1979 while on his now famous "Southern Tour." Back then, this city of eleven million was one big rice paddy, just like Shanghai's Pudong District--now China's financial center. The country's economic development has been absolutely stunning as any visitor will tell you but this transformation has come at a terrible cost: corruption.

The problems with China's project finance sector stems directly from the way these transactions are put together. The focal point is the arranger of the deal who charges the SPV an advisory fee equal to 3% of the deal size. Next you have the lead investor (generally a Chinese institutional investor--the local, provincial or regional office of a big bank or insurance company). Then you have the lender which provides leverage. And while the particular mix of parties to any transaction may change, the fee arrangement is the same 3%. Those monies, of course, are pocketed "under the table" and with 1% each, everyone wins. Except China.

Glorious indeed.

 

buzzsaw99's picture

at least they write off bad loans instead of sweeping them under a tarp.

DosZap's picture

buzz,

Yeah, and then they tie you up, and pop a 7.62 round in the back of your head..........and kick you in the ditch.

Walk your debts on THE murdering Regime Kings  of the Planet?...........

You would have to be raving lunatic.Eveyone involved in this negative press, will die, or be slave labor for life.

( Between Mao, and Stalin) thay have to hold the worlds records for murdering their own citizens.

The REDS, HATE any bad news to get out...............

freshman's picture

All should be well - the real Chinese government has $2.5 T in its pocket. It's no where near the indebtedness of its US counterparty.

On a separate note, the latest US ECRI is -10.5%. If one were to use history as guidance, it indicates 100% recession probability.

R.Temple Bligh's picture

Thanks for posting the ECRI numbers. I have been looking...thought it would get more press going >10%.

vote_libertarian_party's picture

press?

pu-leez!

The 'press' only reports news as good news.

Only bloggers will report what -10.5 means.

LeBalance's picture

Since China appears to be playing "honest John" in the ratings department (but we know its the same weasels) and China appears to be playing fair mark-to-market on their loans, by taking a whopping haircut (and we know that looks are always deceiving).  The question becomes: "Is China's role to be the 'Great Enemy' of the 'West' in this next conflict.  The country that played light on the shadow puppetry?"  I would think so. (because they are the same weasels we have.)

So (1) China is crystallizing the capability to be the ratings agency of 1st resort, especially if they maintain a reasonable rating on schlock (and they are sensitive to Bloggers.), the job will be theirs. (2) China is thinking about dumping treasuries. (3) China has proven historically not to be sensitive to the pains of its own subjects, in fact those subjects know better than to voice those concerns (Tiananmen and the bloody putsch after).

Now China is telling it "like it is" and establishing credibility in the above loan sector.

It seems to me that this force will be hard to resist.

And it also seems to me that Mr. Hendry has been camping out with this concept (short the ^^^^ out of China) for a wee while.

On the other hand, this is playing everything straight from the headlines.  And we know where that gets you.

Itsalie's picture

The next shoe to drop is hanging onto the cliff egde with one arm. The similarities between US-Europe of 2007-2008 on the one hand, and China/Asia now, is uncanny. US/Europe experienced overheating and high inflation as a rsult of their housing bubbles prior to 2006 forcing the subsequent tightening and crash landing. The same problem of soaring inflation and overheating from easy money is forcing India, Korea, Australia, Malaysia to tighten now. The rest of Asia, ie China, HK, Taiwan, Singapore should also be tightening now but are delaying as much as possible, the same way the Fed did, for fear of triggering the implosion of their massive real estate bubbles. In 12 months time, soaring inflation and massive decline in real wages in the latter group would force desperate tightening, crashing their housing bubbles and claiming a few banks along the way. IMF would be called in, more money would be printed, bailouts would take place. Fiat currencies would be devalued, sovereign crises would force regime change, austerity would be preached and the cycle is complete. The storm would have moved from the US to Europe and finally land in Asia. US: 2006-2008. Europe: 2009-2010. Asia/China: 2011-2012.

 

ozziindaus's picture

Do they have debtors prisons in China or do they just back the truck up?

http://en.wikipedia.org/wiki/Execution_van

DoctoRx's picture

From each according to his fleece-ability; to each according to his greed

No Mas's picture

So are ZH'ers buying in China?  Who gives a damn?  I told you guys yesterday to buy buy buy!!! Up 200 for god's sake.  Now look at today.  Up Up Up!!!

Listen one more time.  Money is free and Mr. Ben is going to keep it free forever.  Not for a year - FOREVER!!!!  The political class will keep enough dumb ass americans out of work such that there will be no inflation so keep the money flowing Bennie!!!

So what's up with the collapse of Europe ZH???  OOH,  the stress tests aren't valid.  OOH, the banks in the EC would have already collapsed except for the ECB "printing" money.  I'm really scared.  Good god man, wake up and smell the recovery.  It's everywhere- the US - Eurpoe - Asia - EVERYWHERE. 

So how's that whole Europe is falling apart trade working out for ya??  Looks like they're going gangbusters just like the good ol' US of Obama.

Get on board boys or get left behind.  Like the little men from Mars - we are green yet again.  Hot damn, it feels good to follow the smart money!!!!

williambanzai7's picture

Ever look into those implied guarantees?

No Mas's picture

I really don't believe in little green men from Mars either :)

I do wonder when we'll see the results of either continued economic weakness or recovery in this market.  Seems the market would favor higher either way with ZIRP and the QE's to come.  Can't fight the tape and earnings seem to coming in where needed to "pump you up" if you know what I mean.

My guess is nothing much will happen and it will happen very slowly.  Seems the world has been ending since Jimmy C and yet, here we are with the same ol' same ol.

Eternal Student's picture

Never trust any news coming out of China. Seldom can it be verified. And especially this particular piece, due to one unnamed person who can well be making sh*t up in order to profit by it.

Honestly, this is just a rumor piece. One could probably get better info out of a Comic Book.

Give me verification, and maybe I'll believe this story. I'm not saying that China isn't in trouble. But this story is just plain rumour mongering.