Guest Post: China 'Addicted To Credit'

Tyler Durden's picture

Authored by James Parker via The Diplomat,

Whilst the economic data shows at least some signs of an anaemic turnaround, China’s corporate results are demonstrating just how difficult things have been.   China’s companies are busy reporting their 3rd quarter 2012 results and there have already been some disappointing results – pretty much explained by the general slowdown. Connected to this however, a worrying trend is developing on many companies’ balance sheets.

Some big names have already seen disappointing profit growth. State owned-Sinopec,  China’s (and Asia’s) largest oil refiner, saw its 3rd quarter profit fall 9.4% and January-September profits slump by 30%. Sinopec is trapped between high crude costs and government mandated price ceilings on sales to consumers.  Oil giant PetroChina also suffered, with its 3rd quarter net profit down 33% compared to last year, driven in part by a $6 billion refining loss over the year-to-date (YTD), and part by a similar squeeze on its natural gas import business (in which its YTD profits have fallen 93% compared to 2011).

China Southern Airlines saw third quarter (3Q) net profit fall 29%, whilst China Life, the largest Chinese insurer measured by premiums, swung to an outright loss in the July-Sept. period.  Meanwhile Sany Heavy Industry Co. Ltd, China’s largest maker of heavy machinery and construction equipment, was hit by 59% fall in 3Q net profit.  Baosteel, one of the largest producers of the metal, saw net profit down 4.88% from a year earlier.

The auto industry in China is undergoing stresses too. Compounded by the fallout affecting Japanese automakers over the island dispute, data shows that overall national auto sales at the end of September fell 1.8% compared to the end of September 2011. BYD, the Chinese company famously backed by Warren Buffet, reported its 3Q 2012 profit sliding 94% compared to 3Q 2011. 

Indeed the auto making sector was put on notice by the Ministry of Industry and Information Technology last week when the latter warned in a statement that the industry required some serious downsizing or consolidation. The statement contained the shocking news that nearly a quarter of China’s nearly 1,300 automobile makers are on the verge of bankruptcy, and hinted that involuntary bankruptcy may be forced onto some of the smaller players.

Most worrying is a drastic rise in the amount of “accounts receivable” (A/R) on the balance sheets of Chinese companies.  Accounts receivable is an item of money owed to the company (from customers) which has not yet been paid. Many transactions are done on credit, and it is normal for companies to have these items on their accounts.  However, Chinese firms’ accounts receivable are estimated to have risen by 45% year-on-year (YOY) according to reports filed so far, whilst sales have climbed by less than half that rate. 

During a slowdown, it is common for payments to be delayed as everyone hangs on to cash. Some companies, though, can be tempted to avoid curtailing production by offering reluctant customers much easier credit to encourage sales, the hope being that the slump will soon end and “natural” demand will pick up again. The trouble of course is that if the slowdown is prolonged, or the recovery weaker than expected, these accounts receivable might turn “un-receivable”, and thus have to be written down as losses.  An increase in A/R is expected, but such a large increase suggests that some companies have been staying in operations through this vendor financing.

In the struggling coal sector, at the end of June, accounts receivable had jumped 52.8 % for the 90 biggest coal firms. YOY Sany’s tally increased 83% over the first nine months of this year, outpacing a still worrying general trend in the heavy machinery sector.  The steel sector is also under stress, as are some parts of the country’s export industry.

China’s economy, as explored previously, is addicted to credit. These large rises in accounts receivable show that it is not only financial institutions and the shadow banking sector which are involved in credit creation.  A payment delay or failure by one company can resonate through an entire supply chain, as each entity feeling the cash pressure then delays payments of its own. The need for a stronger turnaround is becoming more and more urgent.

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ACP's picture

Is "." some kind of Jungian thing?

Wakanda's picture

Sometimes a "." is just a "." - Freud

IndicaTive's picture

dunno. i don't trust it. i'll just watch it for a spell. carry on.

(it was placed by a ghost)

Dalago's picture

Why the FUCK was there a Romney ad on the right side of this site?

Element's picture

Because Goog Adds is reading the cookies currently within YOUR browser, to see what YOU have been surfing and reading up on, so that it can tailor adds according to YOUR personal political preferences.

enjoy! :D

Motorhead's picture

Hey, leave NSA out of this!  (Hee hee)

Dalago's picture

ok I was using a satellite comp thank god... was freaking out.

hairball48's picture

I read about Google doing that. I'm not computer savvy. Can anything be done about Google putting those cookies in my machine? Scary shit imo

TwoShortPlanks's picture

My ZH page is encircled by porn...looks bad when my GF jumps online.

My response to questioning is simple, WAZ-N-ME:

q99x2's picture

It must have been the ghost of Dick Cheney's heart because as far as I know Hillary hasn't replaced the rest of him yet.

Gully Foyle's picture


Vonnegut had a nice little explanation for what "*" means.

Silver Bug's picture

China is addicted to Credit, sounds like they are learning from the U.S a little too quickly.

DoChenRollingBearing's picture

From the article:


"Indeed the auto making sector was put on notice by the Ministry of Industry and Information Technology last week when the latter warned in a statement that the industry required some serious downsizing or consolidation. The statement contained the shocking news that nearly a quarter of China’s nearly 1,300 automobile makers are on the verge of bankruptcy, and hinted that involuntary bankruptcy may be forced onto some of the smaller players."


In PERU there are at least 70 different Chinese auto & truck brands.  Last time I was there (March) I myself saw at least 40.

So, YES, there is going to be some serious downsizing and consolidation in the Chinese vehicle manufacturing industry.  It will be a bloodbath.

Monedas's picture

Monica's lesser known white dress ?

Yen Cross's picture

 "Whilst the economic data shows at least some signs of an anaemic turnaround".

It's all just pre-party change B/S. We all know how long it takes to put the "PBOC Death Star ", on a new trajectory...

guinea's picture

The state run companies are the biggest culprits.  Private companies and real estate purchases are funded by IOUs from family members, neighbors, communities, but if you trace far enough, you'll find that the real money leads to one of the big state run companies.  So the argument that people in China buy real estate with cash and thus there's no housing bubble is pretty much bullshit.  

Urban Redneck's picture

Then they could just pay it off with US Treasuries

Cosimo de Medici's picture

Pay off whom?  You think those USTs are just sitting in some big box unused?  The USD may be backed by nothing, but the yuan is backed by USTs.  Maybe nothing from nothing leaves nothing, but one printed yuan for every dollar of trade surplus---and surplus does not mean profit, it just means revenue in vs. revenue out---is why their money supply growth dwarfs what Ben has done.  Also, just the shadow banking system in China (you know, the one where rates are 5-10% per month) is nearing the size of all those supposed reserves.

The last few years---best evidenced by the SSE---has laid bare the profits, or lack thereof, thrown off by China's "economic miracle".  Can you find a single ongoing concern that has a profit from normal operations, and not just (previously) from gains on RE speculation?  And how's this for "hypothecation" or Chinese-style fractional reserve lending:  Chinese companies get cheap trade financing from the government to buy commodities like copper and iron ore, then use the warehouse slip as collateral to borrow even more money from banks or the shadow banking system, which many have then put into RE.  With the price of RE now falling, that's bad debt squared.

Element's picture

If you're going to discuss the issue of currency imbalance and trade flow impacts then maybe it should be mentioned that any Sovereign State that prints its own currency can print to cover any such apparent imbalance at will.  Which means a country that did this can remove the imbalance plus devalue at the same time, thus also gains currency-exchange driven export trade advantage, except this would immediately produce naked currency war, trade war, and possibly armed combat as well (proxy or direct) in due course.  Hence, it's an option, but not one any state is using - yet.

But the unresolvable imbalances imply that this is actually coming, regardless.

But all that's happening now is that countries like China and Japan are trying to do the same things, destroy each others trade competitiveness, but via more acceptable (less immediately confronting) means.  And that will work until it doesn't, and when it doesn't and the govt bonds don't sell so good, then massive printing is on, regardless.

Plus another thing people seem to have lost sight of is the fact that this MMT-fiat imbalance dynamic is the very reason why the Euro and the Eurozone were, and certainly are doomed to fail, because the uncompetitive member states will and are being inevitably and relentlessly crushed by the global and regional export trade competitiveness battle. And now, due to the Euro and ECB, have no way as Sovereign States to redirect trade flow, via independent competitive devaluations.  But the Euro and Eurozone are a brilliant idea if the real plan longer-term is to impose a Federal German-dominated political construct upon a swath of financially and economically demolished desperate states, to 'rescue' them with the allure of on-going transfer-payment sugar. 

Hence Golden Dawn and Anders Behring Breivik type individuals emerging in reaction to EU Commission policies.

This whole MMT fiat theory and trade theory, as applied to our earth, will, and is leading to the rise of radical nationalism and an unstoppable slide into political decapitation of centralist controllers, with the embracing of stark violent revolutionary sentiment and actions.  We can see this trend right through Europe, China, Japan, Brazil, India, and the US (and open-ended FED QE will simply drive it forward even faster).

Read: The Inescapable Trilemma of the World Economy

As that link makes clear, we see in the EU Commission and Eurozone case the sacrificing of Sovereign laws, immigration controls, and currency, and the bypassing of democracy via the Lisbon Treaty dictates, etc., is not going well.  So far its been all downsides for the 99% worker-prole-chumps, with no evident pay-off for them other than an economically and socially soul-destroying poisonous drip-feed of alleged 'bailouts' (which are no such thing). 

Which means it's going to be the other option, the global economic integration that's going to be abandoned instead, as a necessity, and the former state assets, borders and laws re-nationalised. 

This is a GLOBAL DIVORCE that we are now facing, and it's going to be messy, frighteningly fast, and very dangerous for all. 

It's in effect the abject failure of the NWO bankster elites to corral humanity into a global criminal bankster-oriented 'utopia', that suits them and no one else, and that was always going to be implicitly unstable, and bound to disintegrate.

The question is;

Will we make the same mistakes in future, of going down this same primrose path of bankster-dominated 'globalism', via its false-promises and easy credit (i.e. massive debt), to create the shallow illusion of 'wealth', that we so easily submit to its cheap-talker sound-bites and its integrative 'agreements', that lead to its political and social suppression and oppression once more on us?

Urban Redneck's picture

But USTs aren't even issued in paper from any more, they are simply a series of digital 0's and 1's which are instantly transferred by FedWire between various "virtual boxes" where they can be used as collateral for currency issuance, cash borrowing, or regulatory capitalization.  Lot's of people spend inordinate amounts of time tracking and analyzing the volume of USTs nominally owned by China, but very few seem to devote similar effort to tracking and analyzing how the USTs that China owns are actually used, and how that usage changes over time.

disabledvet's picture

China could very quickly become a net exporter of commodities. It sure explains the collapse in the price of coal a lot better than the whole "nat gas" thing. their stockpiles of copper are simply staggering. between China and India it's amazing there's a single steel mill left open on the planet. and we don't have a solvency crisis in the USA? "nothing firing a few school teachers can't solve"? REALLY? What would be interesting is if China started EXPORTING oil! they already produce their own cars. Oil is used for very little actually once you take the cars and trucks out of the equation. talk about unleashing "gales of creative destruction"....

orangegeek's picture

All of the Asia indexes topped last year or in 2010 in the case of Shanghai.


US Indexes topped recently.


It's going to be an ugly and prolonged ride down.

ReptilianSlaveMaster's picture

Is the battle of the barren rock not spurring demand for quality made Chinese roadturds

Matt's picture

1.8% drop in car sales doesn't sound like a big deal. BYD having its profits shrink 94%? Wow, is that going to affect Berkshire Hathaway stock?

mick68's picture

It is when you're talking about China, the great white hope of the world that's supposed to be doing double digit growth in sales.

Rick64's picture

Easy credit is the best way to expand and prolong the bubble.

Zero Govt's picture

and when the bubble blows up nobody, but nobody, is held responsible for the carnage

Hows' Visa and Mastercards endless credit card (debt) biz model doing?

Oh it's blown up after 30 years of hard work at pumping and priming the consumer debt generation. Shame.

And they've moved effortlessly onto our banks debit cards without a word from politicians, the banks or a single journalist in the Western world for their part in the debt-slave nations.

The terrible twins (global duopoly) tip toes around the financial world in deathly silence. 

This kind of deafening silence takes alot of muscle/corruption.... doesn't it Parasite Club?

No worries the twinkle toes twins, your invisible cloak is working a treat, nobody has a clue about you crooks global skimming operations ...Ssssshhhh

Zero Govt's picture


China 'Addicted To Credit'

Don't tell me the Rothchild-Rockerfeller pump and skim operations, Visa and Mastercard, have got in there already?


Element's picture

Don't know why this is even news given that credit growth is so solidly correlated to GDP growth.  Try getting 10% GDP growth per annum without commensurate credit growth and see if you do.

On a finite developed world or country, if you want 'growth' you have to head-shot the toxic TBTF zombie bank, to get the major credit writedown needed in order to make way for a new credit supply from entirely new banks.

And where's the new 'capital' debt-money coming from?  They will invent it out of nothing at all like they always have, and with the likewise freshly bankrupted prole/taxpayers 'backing' it all.

In the meantime the bad actors you mentioned are just too busy asset-stripping with their old debt scams to do all that yet ... come back in a few years.

Same as it ever woz.

Zero Govt's picture

Not sure i agree you need credit/debt growth in order to finance real GDP growth. Does the link between credit/debt growth and GDP growth include Govt debt, Govt promised debt (ie. pensions, welfare etc)?

What i'm getting at is Govt debt has passed 100% of GDP in many countries, is it the Govt figures skewing both credit/debt rise and the GDP figure? Because Govt spending is not GDP, all of it is a black (unproductive) hole, a 'Death Star' in the nations accounts 

We also have credit/debt rising like a self-propelled rocket ship ever upward while GDP is like a running out of evergy canon ball. Credit/debt was rising with GDP but now GDP is declining, falling out of the sky as its initial energy is spent. Every $1 of new credit/debt stimulates ever less GDP growth, the 2 have diverged, de-coupled, gone their seperate ways not to converge and fly together for a long time to come

not surprising when you consider the worst Hedge Fund in the country, the Fed, is pissing money away like crazy backing the biggest losers in the economy who've created the most carnage and chaos, banks and Govt.

If you take it down a level from the economy (ie. a pretty delusional concept used by pretty delusional people, like economists, politicians and central bankers) to company (ie. a reality) level the directors fund growth either from Co savings, their Co profits or externally from bank or other loans (maybe someone elses savings such as a pension fund or investor or shareholders pockets).

Banks have cornered the market because they have easy money making it easy for them to throw it at anyone for anything. But many drectors don't like easy money, don't trust banks or external revenue sources for that matter, and prefer organic self-financed growth as they simply don't like others noses in their business.

Yes it's a "finite world" in terms of available atoms but we are but an iPhone on a whales back, we've thousands of years yet to become an iPad and thousands more before we're an iMac on the whales back.

And if you understand growth (productivity) you'll understand it's about getting ever more (bang) out of ever less ($bucks). Advancement up the industrial ladder actually makes us less demanding on our resources, not more demanding

Wakanda's picture

Here is a guess:  TPTB in China were told to keep up appearances until after the US elections (just like TPTB were told in Europe).

We'll know in a few weeks after the dust settles in the Red/Blue game show.

JustObserving's picture

China may be addicted to credit but USA is addicted to deficits.

The deficit for October of $195 billion was enough to provide 145 million jobs at $7.50 an hour for the 135 million workers in the USA.

It took from 1776 to Oct 23, 1983 to get the first trillion in US debt.  Now we create a fifth of that in just one month.  We are creating debt 500 time faster now.  And unfunded liabilities now grow 4.5 times faster than the debt.

US debt and unfunded liabilities now grow at $70,000 per household per year.

Bobbyrib's picture

Adjusted for inflation, the first trillion was probably the worst. There is no way we pay back the debt and no way either candidate will stop spending.

The Shootist's picture

I think them Chinese are nothing but predatory lenders. Like Peter Schiff says, they should have known better than giving us all this $ when we could never pay it back. They didn't do their due diligence, and we're victims!  (I"m being facetious but not really.)

helping_friendly_book's picture

Can't you imagine, for a moment, the Chinese bought our debt with the goal of shortselling the debt to end the petro-dollar strangle hold on the world market?

We are  being set up to be short sold by the Chinese. With the Euro failing which currency take the mantle of reserve currency.

When China has a fire sale on the remaining Trillion in Treasury debt financing our deficit spending will be over.

ZIRP will go to 25% coupons. 

The USD will, eventually, become trash.




I don't think you understand the Chinese have us by the nuggets and are going to squeeze.






fnord88's picture

no way. China is not going to squeeze the US. America can still crush them militarily, so they will not provoke her. When they bought that debt they knew they would never get paid back. Try and sell it and the Yuan will soar and crush their economy. They are playing the longer game, buying treasuries they know will not get paid back to build their manufacturing base by keeping the Yuan low. They know the USA will explode on her own, so they will just keep building manufacturing, roads, rail, energy supplies, stealing US secrets, and of course buying GOLD hand over fist. When the USA collapses on her own, they will not be blamed, and they can take over as they will have the biggest gold pile, and infrastructure that isn't 100 years old. 

Matt's picture

"America can still crush them militarily, so they will not provoke her."

China is a nuclear power. There is no "crushing" in Global Nuclear War.

"A strange game: the only way to win is not to play"

1eyedman's picture

disagree.    the Fed has the other cb's by the nuggets....the fed controls (almost completely) global currencies.   notice how the canadian and aus dollars are almost parity?  plus the pegged currencies...eur to 1.05 and mission accomplished.  

govts cannot just sell out us debt....they sell--say a lot, fed monetizes it (to keep rates stable) now china has a ton of dollar bills....sell those to get yuan,yen eur etc....and the dollar goes downhill, other currencies go up....and what does that do to the purchasing power of dollar holders for chinese goods....see? 

think massive deflation being fought with printing presses....the most liquid financial securities get the funding....futures and esp commodity futures:  low rates, sideways stock mkt w/ 20-30% quarterly swings; and massive inflation in commodities.   


helping_friendly_book's picture

China's exports to the USA are dropping and the Chinese are less dependent on US trade, which means less USD  for the Chinese to exchange.


 In 2007 China converted 1/2 of all USD coming through trade w/ the USA to US treasuries and the other 1/2 internally spending the other half on infrastructure and pegging their currency to the dollar. (source: NPR)

This is no longer their currency regime.


There has been fundamental, paradigm, shift in the USA-China relations. Do you notice Obama and Geithner bow to Wen Jiabo and Jiang when they meet? 

China is signing new trade agreements (50 billion trade agreement w/ Germany last Year) and converting substantially less of their USD for Treasury bills/bonds. They are/have been divesting themselves of USD by spending USD on hard assets, such as gold, iron ore, copper etc.

Chinese treasury security holds have been reduced by 1/2 a trillion dollars since 2007. 

Why hold US Treasuries when you can hold gold? Much has changed in 5 years. 

The Chinese are trading gold, with Iran, for oil further threatening the petrol-dollar.

This is what the Chinese think of FRBNY policy:

Yesterday in China, a group of students at Peking University laughed aloud during a speech from Treasury Secretary Tim Geithner, during which he insisted the U.S. dollar was strong and that trillions of dollars of Chinese investments would not be unduly damaged by the economic crisis. "Chinese assets are very safe," was the comment that "provoked loud laughter,"

That was in 2009 and I can assure you the situation since then has deteriorated.

You think Geithner has the upperhand dealing with the Chinese?

Check it out! I think you are delusional.

Fact: China has the largest economy in the world.

Fact: China could dump their Treasury holdings with minimal disruption to their economy. They hold our debt as a tactical measure. 

See their new stealth fighter? They can boost their own economy by military spending just like Reagan did in the USA in the 1980's. 

The EURO and the USD are doomed to fail. 

The last time we fought the Chinese they sent 1 million VOLUNTEERS across the Yalu river and beat us back to the 38th parallel. I don't hear anyone boasting about that war! The Chinese can throw 10,000,000 soldiers against the West. You think we can beat them.

What will the 47,000,000 EBT cards do when prices double at Walmart?






ZFiNX's picture

Actually this behavior is more likely greedy front-running of the turn-around.

EatYourCornTakeyourPill's picture

What ever is happening to the chinese solar sector? They were supposedly driving U.S companies out of business, was that all bs? Any good or bad news with chinese solar out of curiousity.

Peter Pan's picture

The phenomenon of trade credit is by no means a Chinese problem only. Worldwide, a complex chain of credit has been building up and is precariously poised to cause great damage. The problem with credit is that it usually involves a whole loop of creditors and debtors and the moment one part of that chain breakes, the whole chain is in jeopardy.

In Australia, the failure of some high profile builders, brought down many suppliers and sub contractors, caused much damage to unpaid workers and inevitably involved the banks right across the spectrum of not only debtors but also of creditors who had one side of their balance sheet totally gutted.

Element's picture

Very same thing is happening this past week with regard to the hundreds of car parts lay-offs that were just announced.  Australia is in for a rougher ride down this time, than last time.

Bansters-in-my- feces's picture



Zero Govt's picture

Bansters, please no spell and diction checks or you'll be all over my posts like a rash!

English teachers have to realise if bloggers are bad that they had their oportunity during years at State education and failed. Don't chase us after school hours please.. Cheers

The Shootist's picture

Doth best best hold thy tongue naive.

Kimo's picture

China addicted to credit.  Who isn't.