More On China's Trillions In Unrepayable Project Loans

Tyler Durden's picture

Last Friday we reported that the most important (and most underreported) story of the week was Bloomberg's disclosure that 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, and that only 27 percent of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded. As this is a topic that deserves much more attention, we present the views of Goldman's Ning Ma on this critical issue, which when combined with Fitch's recent disclosure that the CDO market is ramping up in full force halfway across the world, and that China has 66 million vacant homes, should all come together in a nice and tidy confluent package of a combustible real estate-cum-credit explosion. Of course, this being Goldman, guess which way the spin is pointed: "We continue to believe systemic risks associated with such loans are limited. Key to watch: The results of restructuring and NPL recognition in 2H10 (mainly from unrecognized social projects and misused loans, but likely far less than 23% NPL ratios), and credit cost allocation among banks and local gov’ts." In other words, ignore the biased conclusion, but certainly focus on this most recent unravelling of the Chinese bubble.

 

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Dr. No's picture

Chinese "Failure to recoup" is loosely translated into american as "Bailout" or "Stimulus"

kato's picture

they still think like communists: just take the money and build some useless thing to sit idle - no such thing as a loan; "money" taken does not have to be paid back, comerade.

Eternal Student's picture

Apparently they see that as a better investment than in Treasuries. I'm not sure that I blame them. :)

Chunkton's picture

Good point, if i were an Elite I'd rather be in the USA where I know all the money I spend on lobbying aka bribing politicians and local government will pay off, just look at the statistics: peanuts for fortunes. Americans stay bought as they have integrity, bloody Commies though would be untrustworthy, would probably be back wanting more. Frickin Commies wasting money on ghost cities and bridges to no where, America has Cash for Clunkers and Wall St bailouts, much better use of tax payer money. Enough, I'm gonna go polish my M-60, you pussies have a problem with that?

AR15AU's picture

Lets face it...  China can afford to take the loss, and they won't need to hide it on their books. However, the significant part of the story is the slack in their economy, and the prospect for future demand.

DanielH's picture

Totally agree. The Chinese government is asset-rich, but cash-poor possibly in the near term. The government owns 100% (!) of lands and major businesses in China. They can easily raise money by selling some assets. Look at the recent sales of the Agriculture Bank of China. People here in the West just don't understand the structure there and are over-concerned. The bubble will surely deflated in the future. Some people or some banks will get hurt. But the resulted infrastructure will benefit the society for many years to come. Take the recently built Shanghai-Nanjing High Speed Railway as an example. It was reported that customers are reluctantly switching from the express trains to high speed trains. In next few years, the line may be operated in loss. But eventually the regional development will catch up and the benefits will show up. Near-term loss is not a big deal. From the society point of view, it is much better to place workers to build something which will result in near-term cash-flow problem but long-term benefits than to let workers sit in home watching TV and receiving unemployment checks.

reader2010's picture

Chicom's gonna use their printing press to further enlarge their monetary base as they always have since their reform started in1978. IMHO Chicom's deliberately leaked this story out to dampen the cries for higher yuan.

here comes the clue:

http://www.bloomberg.com/news/2010-07-27/china-regulators-officials-aim-to-ease-local-finance-vehicle-loan-concern.html

 

 

China Moves to Ease Concerns That Local Governments Are at Risk of Default

 

 

Bartanist's picture

Looks like lots of possible set-ups from that article:

a) secured assets, so the bank may end up owning the projects

b) potential that they will start instituting higher taxes to pay for the failures (socialize the losses, US style)

c) just write off the debt as if it does not exist

I think this falls into the catagory of the story why China does not automate their farms: "What will all of the farmers do, then?". If they stop building, then what will all of the builders do? Would they go on welfare (extended unemployment) like in the US?

reader2010's picture

China doesn't have real estate property tax yet. But their national sales VAT is at 17%, plus s few % points for local sales tax. Generally you pay around 25% hidden tax on retail sales. Do you really think they can kick start some serious domestic consumption rate at that kind of high sales tax rate? 

OldTrooper's picture

25% - that's not much different than the hidden cost of our tax system - and then we pile on local sales tax too.  How are we doing?

reader2010's picture

But at least we get some social safety nets and in China you get nothing. 

Clancy's picture

Nothing from the government you mean.

OldTrooper's picture

I have no information on Chinese social safety nets, or the lack thereof.

We can save the topic of the efficacy of our social safety nets for a more appropriate thread.

Rusty_Shackleford's picture

Please don't euphemise. 

Say what it really is,... out loud.

Pointing a gun at someone and saying "Give me your money so I can buy votes with it or I'll put you in a cage like an animal - or just kill you if you resist" is not a "social safety net". 

It is robbery and theft at it's lowest form.

There are plenty of real "safety nets" available.  They're called insurance policies.  They are voluntary contracts between two parties that are enforceable under law.  There is no threat of violent coercion involved and cannot be reneged by a politician's decree.

see: http://quotes.liberty-tree.ca/quote/lysander_spooner_quote_b8f9

DosZap's picture

Mass murders upcoming from those that were in places of USING that YAUN........

The Reds, do not suffer failures with China's wealth, like the USA does.(payment for FUPS, is swift, and deadly).

LOL

They would have nailed GS & JPM a LONG time ago....LOL

Fritz's picture

So, according to Goldman they think the credit damage is....  (wait for it)

"well contained"

 

I can't remember where I heard that before.

Village Idiot's picture

you were on that conference call with my financial advisor.

Rusty Shorts's picture

Wait, what, I thought China was booming, I mean, look at all these tall buildings for gods sake.

 

http://www.youtube.com/watch?v=ektMQGbW3wk

tony bonn's picture

 "We continue to believe systemic risks associated with such loans are limited."

lmao....the chicoms will struggle to recoup 23% of loans and only 27% of loans are repayable from cash flows...and "we continue to believe systemic risks....are limited..."

and obama is not an indonesian citizen born in kenya....yep

Testicular Cancer's picture

Wow, I did not know there were Chinese symbols for Goldman Sachs. I wonder what it translate to?  (enter your opinion below).

reader2010's picture

I was told it means "buy low sell high."

chindit13's picture

Long (transliteration) story coming here....

In Japan back when Salomon Brothers (and Japan) were still ongoing concerns, the "katakana" characters for Salomon were pronounced So-lo, even though Japan has characters for a "sa" sound.  Being a bit of a pedant, I pointed this out to a Japanese female colleague one day.  I told her that it was Salomon, not Solomon, who I said was the King of the Jews.  She asked me, "In America?"  A bit befuddled, I just answered, "No, that would be Henny Youngman".  She nodded in acknowledgement.

Even considering that Japan is a Shinto/Daoist/Buddhist land, it was at that moment I accepted that the US education system was not as bad, in a relative sense, as I had once thought, and that Japan was probably not going to rule the world as so many then-current books (now residing on the "steal me" tables of your average Borders) were claiming.

Edit:  Just remembered another incident that left me befuddled. 

One day a female colleague said to me, "Chindit-san, you are Jewish, right?" 

"Why do you think that", I asked. 

She responded, "Because you wear glasses" (this colleague is a graduate of one of Japan's finest universities).

"So Tanaka-san over there is Jewish?", I asked.

"Don't be silly, Chindit-san" was her reply.

And when the crash happened in 1990, a host of newspaper articles and a few books "broke" the news that it was the work of "the Jews at Morgan Stanley".  Old Wall Street types, as well as Jewish people who applied to work at MS anytime before about 1980 would appreciate why that is funny.

Guess I've drifted enough off topic.

trillionaire's picture

China will spend all of its foreign reserves to keep their population employed.  They are not in a "better" situation than the west is.

ARW's picture

In a country of 1.5MM people, 66 million is  a rounding error and about 1 months supply. Just say'n...

Robslob's picture

Better yet...good luck ripping those loan losses from the ever growing black market underground economy there...

It was bad enough they were selling tungsten coated gold to their population...

Max Hunter's picture

The corruption in China is Soooo bad.. Everyone I know (including me) that has done business there, knows and talks about it. I can't imagine that one day this would not have an impact on the structural integrity of their economy..

Clancy's picture

Silly roundeye, corruption is the economy.

DoctoRx's picture

What's the corruption ratio of China vs. Illinois?

Clancy's picture

What's the corruption ratio of Anhui vs. the Federal Reserve?

I don't know if that's a fair comparison. What if we compared corruption in China vs. the US straight across?

carbonmutant's picture

Small gratuities are a social lubricant for speedy financial transactions...

chet's picture

This bubble has spread to Vancouver BC by the way, through Chinese investors buying up every property in town.  The median home price is 9.3 times the median income.

Great shorting opportunity for those more sophisticated than I.  It's tough to tell who will get the brunt when it pops.  The banks are better shielded than in the U.S. because the mortgages aren't subprime, generally with 20% or more down.

The developers and construction companies will get hammered.  And the home owners.  Not sure who else.

JLee2027's picture

For all those thinking China is taking over the world...think again.

RockyRacoon's picture

Yeah, but...

($1.1 trillion) they’ve lent to finance local government infrastructure projects

At least they got bridges to everywhere and fast rail -- all we got was richer rich people.

Smiddywesson's picture

For the immediate future, China is in the same boat as we are.  This is a global event from which there is no escape.  Their prosperity has come as a byproduct of globalization, which is a form of economic interdependence.  On the bright side they have a gazillion different ethnic groups, separated by different dialects, languages, and religions, AND most of these people hate each other.  Everybody was excited about the Century of China when they thought they were going to get a slice of the pie, but now the pie is being eaten up and they are starting to realize they've been had.  Why clamp down on Google?  The government is scared.  They have a whole generation of single child families who aborted their daughters and now those little prices are growing up and realize they don't have a job, they won't ever find a good job, and they are not going to get laid.  The government had better BE scared.  I would be.

Robslob's picture

" they won't ever find a good job, and they are not going to get laid."

 

lmao  +1000000000000000

B9K9's picture

The entire evolutionary history of mankind, indeed of all species, is driven by competition for scarce resources.

Chief amongst these scarce resources, prized above all else, inculcated with a passion greater than any lust for gold, is the mad desire programmed into all hetro males for sweet, young trim.

Wars have been fought & armies launched to satisfy these urges. Every weekend in every neighborhood/city/region in the world, fights break out over desirable females.

This is why bubbles are so important - keeping people actively engaged in work, no matter what it entails, is vastly preferable to managing the minds of hordes of people rather than allow them to focus on what really counts: booty.

Btw, China blows. It is, without a doubt, amongst the primary butt holes on this planet. Only the ME is worse (and perhaps some parts of sub-Saharan Africa). The most beatiful, sunny day in China is like the worst cloudy humid August day in NYC.

The key is to understand migration drivers - the best always leave for sunnier shores. That's why the brightest Chinese always leave for foreign shores like Singapore & Vancouver.

Don't fear China - they aren't the American people's real threat. Our real threat is the occupying force currently commanding the heights of Capitol Hill. Once we get rid of our tormentors, the USA is gonna rock like it hasn't since 1776.

DoctoRx's picture

Vancouver is sunny?

RockyRacoon's picture

At least it's not coal dust blotting out the sun.

Anarchist's picture

The US will continue to try and cause ethnic strife in China just like is being done in South America, Iraq and Iran. The Han Chinese are the dominate ethnic group in China by a huge margin. Any minorities in China who think they are going to accept weapons and money from the US and take on the Han will rue the day. They will be slaughtered. Ask the Uighurs, Tibetans and Mongolians if all the weapons and money the US shipped in to start conflicts saved their azzes.

The same scenerio goes for the Arab and Kurd minorities in Iran. They too will be slaughtered.

OldTrooper's picture

Might want to check in with the Hungarians and Czechs too before starting a revolt and hoping for US help.