Chinese Fairy Tales

Tyler Durden's picture

Submitted by Mark J. Grant, author of Out of the Box,

What you don't know can kill you!
It is difficult enough, in our world, to ferret out the truth and then make rational decisions based upon what you have found. Europe is a good example of this as liabilities are not acknowledged or counted while the propaganda machines roll out the officially mandated numbers. It doesn't take Sherlock Holmes to get at some of the truth though and liabilities, counted or not, still have to be paid. In the case of Europe a great deal of enlightenment may be found in the data available from the Bank for International Settlements and that has been my primary source for arriving at some reality.
Every Chinese joke starts in the same way. "First you look over your shoulder."
In the case of China, and trying to find some glimmer of truth there, the situation is far more difficult. There is no source of real data available and the official numbers do not often add up in any rational way. The country operates as a one party system and it is just the normal course of business that they provide the data they want and when they wish to provide it. It is quite problematical especially if it begins to appear that a severe slowdown in growth is underway. It is difficult to substantiate or quantify what is actually happening.
The game of "Hide and Seek" is a great sport for children. When the Chinese learned to play it though they marked it, "Adults only."
Fitch, recently, began to examine this. They said that the growth driven model is falling apart and that some sort of Japanese deflation scenario could well ensue. Fitch said, "We have no idea who the lenders are, the borrowers are, and what the quality of assets is…" China reports non-performing bank loans at just 1% but this number, on its face seems quite suspect. Then if you consider trusts, wealth management funds, offshore vehicles, inter-corporate lending and special state agencies which provide more than 50% of all of the new credit with no reporting on the health of these loans you begin to get the sinking feeling that something might be amiss.
A student is on one side of a raging river. There are no bridges. He has no boat. He shouts out to Buddha on the opposite bank. “How do I get to the other side?”
Buddha shouts back: “You are on the other side.”
One Chinese bank, Bank Everbright, did not live up to its name recently as defaulted on an inter-bank loan. Fitch further noted that wealth products, with a notional value of around $2 trillion, also hides a lot of lending and allows for off-the-run assets as well as liabilities. To be quite blunt; we do not really know what we are looking at when we assess the Chinese banks. We have recently seen some wild moves in "Shibor" which may indicate that liquidity is becoming a problem but even here it is tough to know to what extent.
One figure you can muse at, that may have some meaningfulness, is China's reported overall credit. Since 2009 it has grown from $9 trillion to $23 trillion. If you consider this carefully, in the light of the rest of the world since the American financial crisis got underway, the increase is staggering.
The reported credit to GDP ratio is now at 200%. This number is the largest on the planet and, if nothing else, indicates a good deal of risk on the table. Fitch addressed this issue saying, "There is no way they can grow out of their asset problems as they did in the past... With credit at 200% of GDP the numerator is growing twice as fast as the denominator. You can't grow out of that." One telling sign here is GDP growth as generated by loans. This figure has dropped from 0.85% to 0.15% in the last four years and it indicates a marked economic slowdown regardless of the Chinese hieroglyphics that are handed to us.
Soc Gen recently reported that the debt service ratio of Chinese companies was 30% of their GDP. This is a telling number and a level that has historically caused problems. If we assume that the debt ratio is 20-30% higher than what is reported then we may be on the verge of a very serious financial situation. The China Securities Journal, last Friday, issued a number higher than Fitch indicating a credit to debt ratio of 221%. This would put interest payments alone at about $1 trillion which is a staggering amount of debt that must be serviced.
I think some people/institutions in China and Asia are beginning to recognize that the scent of jasmine is no longer in the air. Foreign withdrawals from Chinese equity funds were the highest since 2008 for the week of June 5. In the same timeframe withdrawals from Hong Kong funds were the most in a decade.
Breathe in. Breathe out.
Breathe in. Breathe out.
Forget this and understanding the markets will be the least of your problems.

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kito's picture

"We have no idea who the lenders are, the borrowers are, and what the quality of assets is…"...


funny but i couldve sworn this comment from fitch pertained to the u.s. derivatives market.........................

fonzannoon's picture

Do you think Simon Black finds it annoying when Mark Grant tries to lecture him while his breath reeks of stale scotch while they are riding up the ski lift?

kito's picture

mark grant lecture to THE simon black???!! THE simon black???.......pshawww, thats heresy fonz..............shirley you know, its almost worth a pilgramage to chile just to discover who simon black really is........i guarantee i would become an enlightened being the very moment i laid eyes upon him.......

Oh regional Indian's picture

In june 2008, if i may toot....

v We always speak of six-sigma as a statistically improbable outcome in any normal distribution.  I firmly believe, we don’t live under the same bell curve that all our assumptions are based on.  We live in a four or even five sigma world from our current code assumption set.  Worthy of pondering.

v Macro economic trends: The US Dollar is under severe, sustained pressure. If true impact of “Real” inflation is accounted for, the canary has already fled the coal mine.


China is staggering under its own curious set of circumstances of a large population set “herded” into rapid “development” mode, much like India.  Most of the “gains” are hype. Credit, cheap and plenty until recently (private equity had moved it into the right hands in preceding years), being the sole driver (flogger?) of growth.





GreatUncle's picture

Glad you mentioned India. The developing world is starting to find it's economic model unravelling.

The west based it's model on cheaper imports, the devloped world the constant money supply of being far cheaper.

Both unrravelling all at the same time.

fonzannoon's picture

I heard a rumor that there is a video of Chuck Norris getting Simon Blacks autograph while Mark Grant is passed out in a recliner in the backround incoherently mumbling about brainyquote's website.

Dr. Engali's picture

Hey count me in on the pilgramage...I love a good bowl of chili.

Political_Savage's picture

Just like the Almight, your senses could not withstand the awe that is Simon Black.

If you were to lay your eyes upon him... one can only imagine.

Sudden Debt's picture

So they're as fucked as we are.


but at least they bought some real stuff with their money....


AMERICA:              CHINA:

iPhones              Telecommunication industry

solar panels        Silver mines

plastic slippers    Gold mines

toothpicks           copper mines

...                      ....;

ACP's picture

You forgot the carton of cigarettes, bag of doritos and dimebag of meth that goes with those plastic slippers.

Badabing's picture

Do yourself a favor; Reread the article except every time the word “China” comes up replace it with WALL St. it’ll make more sense.

caimen garou's picture

yep, it does make more sense! maybe mark just made a mistake. the chinese can play the houdini game just like the U.S. does.

joego1's picture

10 thousand people in line for gold I think says it all.

Jason T's picture

that debt increase has gone to physical cap ex .. that debt is backed by something both tangible, usable and wealth producing.. via productivity gains.  

Even if the debt defaults, at least the structures are still there.



eddiebe's picture

'What you don't know can kill you'. 

What you do know can kill you just as easily!

NeverForgetSilver's picture

China bashing has been going on for the last few decades. There is nothing new. So far it has failed every time. If you want to know China, live there for a period. You will find that you are surrounded with a very dynamic economy with different levels of development. You can find the most modern technologies and most ancient traditions. This is a period of change. China missed opportunities in early 1900s. Instead of transforming into modern economic center like Japan as people expected, it fell into civil war and communism. For the last 30 years, China is on the right track. Capitalism gradually takes hold. With a more and more liberal policy aiming at lifting China to a level comparable or surpassing the US, people focus on creating real wealth for themselves. Now Chinese leaders are the most educated and technical proficient leaders in the world and its people most capitalistic. Vast amount of poor rural farmers are working hard to convert their villages into cities. City people are loaded with cash. People save a lot so they can put their money to reinvestment. Under such an economic circumstance, slowdown is possible but crash is extremely unlikely.

I am truly amazed by so many stupid economists. They cannot even understand the economy around them but feel they somehow can predict the future of a country half world away. My advice is for them to get their forecast for our own economy right first.

Schmuck Raker's picture

You immediately use the words "China bashing" to deride the entire article, but offer no specific arguments against the points raised.

Move along.

NeverForgetSilver's picture

Do you see any thing real in the article? Everything is like I think, maybe, etc. Without firm evidences, how can he draw the conclusion?

Schmuck Raker's picture

Indeed, without "firm evidences"ie. hard numbers, it is necessary to draw conclusions through "deductive reasoning.

  • One Chinese bank, Bank Everbright, ....... recently [h]as defaulted on an inter-bank loan.
  • ...wild moves in "Shibor" which may indicate that liquidity is becoming a problem...
  • ...China's reported overall credit. Since 2009 it has grown from $9 trillion to $23 trillion.
  • The reported credit to GDP ratio is now at 200%...the numerator is growing twice as fast as the denominator. You can't grow out of that."
  • ...GDP growth as generated by loans. This figure has dropped from 0.85% to 0.15%...

Even China's leadership appears to be coming around to the idea they may have been over-investing, judging by their recent changes of policy.


PS I apologize for the dismissive "Move along" earlier. You are clearly earnest, and in any regard it was unnecessary, and... wrong.

NeverForgetSilver's picture

Unfortunately, I have no time to debate you now. Just look at his own words "In the case of China, and trying to find some glimmer of truth there, the situation is far more difficult.". This statement defeats his purpose of appearing to tell the truth. My advantage is that I know a lot of people there, so I can see things from "Ground zero".  

willwork4food's picture

I tend to concur. There are vast differences in the culture and the current situation than meets the eye. For example, I had the opportunity to talk with an old friend that just venture far west from Beijing near Tibet up in the mountains 3 miles high. Even there, they had bottled water and oygen for emergencies-with a hospital/medical treatment nearby. He said the cities and villages were modern and clean with an historic center kept neat. Granted he was just visiting and not there but for a few weeks that told me quite a bit. The other aspect of China is they are vastly more educated than Americans, even if it's to keep themselves  and their families alive in a natural event. They also save-alot more than we do. They do not expect handouts and do not get them. How many inner city Americans dependant on snap cards can say the same?

kareninca's picture

118 baby boys born in China in 2011, for every 100 baby girls.

That's a lot of murdered baby girls.

2012 fertility rate:  1.55 (over two is needed to maintain the population)

Old people being neglected by their "little emperor" obese and depressed only child sons.

That is not a country with a future.

NeverForgetSilver's picture

Where did you hear these? China’s population is growing at 1%/year so it is impossible to have only 1.5 kids per family. It may happen in large cities but I don't think it is the norm. Japan has a rate of 1.7 but the population is declining. In addition, the government can relax the rule so the birth rate can increase very quickly. I heard a friend saying that they have to pay a fine to have the second child in a medium city. I am not very sure. Rural areas certainly do not obey the rule.

As for the gender ratio, you might be right for some extreme regions as I recall reading a report a few years ago. It is not the whole country, which is slightly biased toward boys. FYI, the natural ratio is 1.07 since males tend to die in their early ages without modern medical treatment.

I think you are generalizing some special cases as for the whole country.

But anyway, it is not the most humane societies which have a bright future. It is almost to the opposite. The most humane societies tend to be established and have reached their potential. You may not like it but God does not care what we like or not.


kareninca's picture

It is for the whole country:

You're in denial; if you weren't you wouldn't be too lazy to find that this info is in millions of articles and studies, all over the web.

Country without a future.

GreatUncle's picture

For a better idea of how China is faring you would be better off using India's data and allow for a margin of error. India is now into QE and a food welfare programme (food stamp equivalence) in an economy that does not add up with a serious budget deficit problem at the same time.

What does seem to be happening no matter where you live in this godforsaken world is that the welfare programme in work is becominig ever more common suggests "economically none of it anywhere adds up any more and I do not expect China to be any different".