Big Trouble In Massive China: "The Nation Might Face Credit Losses Of As Much As $3 Trillion"

Tyler Durden's picture

The following chart from Bloomberg showing official Chinese NPL data has its pros and cons.

The pros: it shows that the trend in improving NPLs has dramatically inverted in the past ten quarters and has risen to the highest in at least three years.

The cons: the chart, which again is based on official data, is woefully misrepresenting and underestimating just how profound the bad debt situation is in a country in which each month pseudo-nationalized banks issue loans amounting to the same or more in new liquidity as the Fed and BOJ do combined!

That the Chinese reality "on the ground" is far worse than what is represented was known to Zero Hedge readers over a year ago. For those who may have forgotten, on November 5, 2012 we showed "The Chinese Credit Bubble - Full Frontal" and specifically this chart.

And of course  "The True Chinese Credit Bubble: 240% Of GDP And Soaring" from April:

What is even more concerning is that in order to maintain its breakneck economic "growth" of ~8% per year, China has to continue injecting massive amounts of debt, the so called "credit impulse" or "flow" which according to assorted views, is what is the true driver of an economy, and where GDP growth is merely a reflection of how much credit is entering (or leaving) the system.


The chart below shows that total Chinese social financing flow just hit a record for the month of March.


Completing the picture is the estimated economic response to a surge
in credit. As the last chart shows, in China the biggest benefit to a surge in flow is felt in the quarter immediately following the credit injection, as one would expect, with the effect tapering off and even going negative in future quarters, thus requiring even more debt creation to offset the adverse impacts of prior such injections.



What should become obvious is that in order to maintain its unprecedented (if declining) growth rate, China has to inject ever greater amounts of credit into its economy, amounts which will push its total credit pile ever higher into the stratosphere, until one day it pulls a Europe and finds itself in a situation where there are no further encumberable assets (for secured loans), and where ever-deteriorating cash flows are no longer sufficient to satisfy the interest payments on unsecured debt, leading to what the Chinese government has been desperate to avoid: mass corporate defaults.

But while China's debt - an arcane mixture of public, private, and pseudo-government backstopped credit - is among the biggest in the world, the one outstanding question was how much longer can China keep sweeping the hundreds of billions if not trillions of discharged, bad loans under the carpet and pretend everything is fine.

Today we get some much needed perspective on this topic courtesy of Bloomberg, which has some very disturbing revelations.

Such as this:

An unidentified local bank reported a 33 percent nonperforming-loan ratio for the solar-panel industry, compared with 2 percent at the beginning of the year, with the increase due to Wuxi Suntech, China Business News reported in September.

And this:

China’s lending spree has created a debt burden similar in magnitude to the one that pushed Asian nations into crisis in the late 1990s, according to Fitch Ratings.

As companies take on more debt, the efficiency of credit use has deteriorated. Since 2009, for every yuan of credit issued, China’s GDP grew by an average 0.4 yuan, while the pre-2009 average was 0.8 yuan, according to Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein & Co.

And this:

“The real situation is much worse than the data showed” after talking to chief financial officers at industrial manufacturers, said Wendy Tang, a Shanghai-based analyst at Northeast Securities Co., who estimates the actual nonperforming-loan ratio to be as high as 3 percent. “It will take at least one year or longer for these NPLs to appear on banks’ books, and I haven’t seen the bottom of deterioration in Jiangsu and Zhejiang yet.”

And this:

China’s credit quality started to deteriorate in late 2011 as borrowers took on more debt to serve their obligations amid a slowing economy and weaker income. Interest owed by borrowers rose to an estimated 12.5 percent of China’s economy from 7 percent in 2008, Fitch Ratings estimated in September. By the end of 2017, it may climb to as much as 22 percent and “ultimately overwhelm borrowers.”


Meanwhile, China’s total credit will be pushed to almost 250 percent of gross domestic product by then, almost double the 130 percent of 2008, according to Fitch.

And this:

Based on current valuations, investors are pricing in a scenario where nonperforming loans at the largest Chinese banks will make up more than 15 percent of their loan books, according to Werner, who forecasts a 2.5 percent to 3.5 percent bad-loan ratio by the end of 2015. A further decline in GDP growth would lead to more soured loans and weaker earnings, he said.


Lenders so far haven’t reported significant deterioration in loan quality. Bank of China said it had 251.3 billion yuan of loans to industries suffering from overcapacity as of the end of June, accounting for 3 percent of the total. Its nonperforming-loan ratio for those businesses stood at 0.93 percent, the same level reported for the entire bank.

All of the above is driven by one main factor - a relentless desire to fund China's epic scramble into record overcapacity - after all gotta keep that goalseeked GDP above 7% somehow - which in turn has resulted in the producers competing themselves right out of solvency:

Shipbuilding isn’t the only industry affected by overcapacity. Also in Jiangsu, about 130 kilometers (80 miles) southwest of Nantong, Wuxi Suntech Power Co., the main unit of the industry’s once-biggest supplier, went bankrupt with 9 billion yuan of debt to China’s largest banks, according to a Nov. 12 report by Communist Party-owned Legal Daily. Suntech Power Holdings Co. (STPFQ), the parent firm, defaulted on $541 million of offshore bonds to Wall Street investors.



Shang Fulin, China’s top banking regulator, this month urged lenders to “seek channels to clean up bad loans by industries with overcapacity to prevent new risks from brewing” and refrain from dragging their feet in dealing with the issue.



Government and banks’ support for the solar industry since late 2008 has resulted in at least one factory producing sun-powered products in half of China’s 600 cities, according to the China Renewable Energy Society in Beijing. China Development Bank, the world’s largest policy lender, alone lent more than 50 billion yuan to solar-panel makers as of August 2012, data from the China Banking Association showed.


China accounts for seven of every 10 solar panels produced worldwide. If they ran at full speed, the factories could produce 49 gigawatts of solar panels a year, 10 times more than in 2008, according to data compiled by Bloomberg. Overcapacity has driven down prices to about 84 cents a watt, compared with $2 at the end of 2010. The slump forced dozens of producers like Wuxi Suntech into bankruptcy.

The downside is well-known: should the people not get paid, riots inevitably ensue. Which is why the government will keep on bailing out and pretending the local loans are viable, until it no longer can.

“The central government is hawkish in its tone, but when it comes to execution by local governments, the enforcement will be much softer,” Bank of Communications’ Lian said. “Many of these firms are major job providers and taxpayers, so the local government will try all means to save them and help them repay bank loans.”


When hundreds of unpaid Mingde Heavy workers took to the streets for a second time last November, the local government stepped in by lining up other firms to vouch for Mingde so banks would renew its loans. Mingde Heavy avoided failure by entering into an alliance with a shipping unit of government-controlled Jiangsu Sainty Corp., which also imports and exports apparel.

As for the CNY64 trillion question of how much long the government can pretend all is well, the following may be useful.

The nation might face credit losses of as much as $3 trillion as defaults ensue from the expansion of the past four years, particularly by non-bank lenders such as trusts, exceeding that seen prior to other credit crises, Goldman Sachs Group Inc. estimated in August.

In summary: enjoy the relative calm we currently have thanks to Bernanke's, Kuroda's (and soon: Draghi's) epic liquidity tsunami which is rising all leaking boats. The invoice amounting to trillions in bad and non-performing loans around the entire world, and not just in China, is in the mail.

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Headbanger's picture

Expect to see brutal government crackdowns when the Chinese populace takes to the streets when the SHTF there soon!

Remember, it hasn't been so long since the Chinese have revolted en mass.

And then there is North Korea which will starve even more as China implodes.


Vampyroteuthis infernalis's picture

Suntech Power Holdings Co. (STPFQ), the parent firm, defaulted on $541 million of offshore bonds to Wall Street investors.

Hmmmm, I will give you one guess who is going to take it up the ass......

Signs of the end's picture

China and India and Brazil and many many other countries are already in a state of social disorder and discontent, some more than others. There are allegedly 2 dozen plus protests, some violent, in China everyday. But whatever is happening is tame compared to what's coming. The B for Bernanke DEBT BOMB will destroy more lives than the A - Bomb.

Economic Collapse News_110613 / Collapsing Indian Economy & Trouble in China:

Economic Collapse News Nov 18 - Dollar collapse underway + France (& EU) imploding + Update on Economic Troubles in China
Buckaroo Banzai's picture

One of many, many, many highly quotable lines from a criminally underappreciated movie. Kurt Russell FTMFW.

Ol Man's picture

Given that Yellen has now promised all things to all people (that QE is the right program right now, and that she intends to unwind the 4 trillion dollar FED balance sheet over the next 24 months), China should try to get as much from their US securities as they can.  They have nowhere to go but down...

LawsofPhysics's picture

Every central bank is printing/lying.  No one more than China, the creator of paper money itself.  However, all of the sheep in that nation are on the same page (by force - they have had a police state for a long, long time) unlike the sheep in 'merica.

hedge accordingly.

wallstreetaposteriori's picture

solution:  Buy bitcoins intsead of paying on the loans...... oh wait  the chinese have already run up that bubble as well.  Damn current account surplus!!!!

Running On Bingo Fuel's picture

Wait, you were praising China to the max yesterday for being bitCon visionaries. WTF?


observer007's picture

China pushs BTC

Realtime quotes Bitcoin

Now $ 735 / € 540  after steep dive

Matt's picture

Wow, today is reverse of yesterday, with very high volume outside China, and somewhat lower volumes in China.

highly debtful's picture

Is there any safe - or sane, for that matter - nation left on this pitiful globe?

Dagny Taggart's picture

Nations? How quaint. I think they call them corporations now.

FieldingMellish's picture

and they are people too (except they don't pay as much tax, can have unlimited offshore accounts, are never charged for crimes and, if big enough, never have to face bankruptcy).

Flatchestynerdette's picture

The question was: Is there any safe - or sane, for that matter - nation left on this pitiful globe?

Your answer: they call them corporations now.

Even that's quite not right. These legally bound entities are acting more like AI's running Economics 2.0 from the book ACCELERANDO by Charles Stross (not to be confused with the perverted economics 2.0 quasi-science they're putting out now in fact form text books).


Flatchestynerdette's picture

@highly debtful - the answer you seek is no.

highly debtful's picture

Ha! I was afraid someone would tell me that. And the really scary part is that I think you're right. 

Question is: can we somehow still put a stop to this utter madness and repair the damage?

O wait, I think I already know your answer to that one too. 

Flatchestynerdette's picture

I take it back - I think Iceland might be 1.

They went through their "too big to fail" failure and came out 2 years later w/ a smaller but saner country. They just decided to give the world a big f/u bankruptcy. Admittedly, Iceland is small and didn't cause an avalanche but at the time, everyone was running around saying "how could they?" or "this is the tip of the iceburg" and X country is next.

There was no one next and Iceland did just fine.

Greece should really take a page & just do it but they're confined by too many union workers in the government. They'd rather see ww3 break out than actually do something negative that will yield positive results in a few years.


As for China? Credit losses of $3 trillion. I've got to ask: who's on the other side of that trade and started to sweat w/loss of sleep?


highly debtful's picture

Frankly, I'm still in doubt about Iceland. Everybody outside mainstream thinking always goes nuts about Iceland's courageous stance against the evil bankers, but they screwed a lot of European savers with their "sorry-you-made-a-bad-decision-by-trusting-our-banks-now-get-over-it"-attitude. If I am correct, other European governments, like the UK and the Netherlands had to pick up the tab to make their own savers with Icelandic saving accounts whole again.

Now don't get me wrong, I don't give a damn about these "poor" governments having to cough up the guarantee, but the savers themselves were, in my view, the victims in all of this. (to be clear, I did not hold such a saving account myself)

One thing I deeply admire about Iceland: they were not afraid to see their bankers being dragged to court. Now there is an example to be followed. But I still wonder if Iceland is in such a better shape these days than before.  

As for Greece, for the life of me I cannot understand why they do not return to the Drachme, their survival is at stake. That country is simply dying now.  



123dobryden's picture

yes,They screw, but not They average iceladers, it was They bankers, government didnt have to pick the tab, but they did it, it was their decision, if They didnt, maybe now we would be in much better shape, as They european savers would pay more attention who they banking with..the business was between two parties, business went wrong, two parties should  clean it up, they should not drag other people into this...


sorry about drachma, but if you personaly would have to choose a currency, would you choose inflatory one, or would you choose less inflatory? the only positive thing going to drachma is that the losses accumulated would have been cleaned, but again, it would be average greek people paying and then live with capital destroying inflatory currency on top



q99x2's picture

China won't have problems. Jamie Dimon sold them the US Gold Reserves and now they've taken over the BitCoin market.

Not to worry about China.

LawsofPhysics's picture

Well then, I for one will look forward to selling my soybeans and nuts to China for gold.

Sounds good to me.

Please China does not want anything to do with the reserve currency, too much transparency and liability required.

TPTB_r_TBTF's picture

assuming the Chinese want your GMO soybeans...

they will pay you with SDR, not with gold.

LawsofPhysics's picture

Possession is important.  I don't grow GMO (too much humidity in my area).  I have PMs too.  Eventually, everyone gets hungry let them eat their gold then I'll keep my PMs and eat well.

Canucklehead's picture

You really need to read about the BitCoin market to understand that market.  The link shown below is a good starting point.  Please note this article was written in June, 2013.,3514-8.html

... Satoshi opted for a slowly paced increase of the money supply. And when 21 million Bitcoins have been minted, the money supply will come to a halt. New blocks are generated every 10 minutes, on the average. While the reward for finding a block was initially 50 Bitcoins, the block reward was halved to 25 Bitcoins in late November 2012. This reward halving will happen every four years, thus gradually reducing the money supply to a trickle.


This leads us to the conclusion that the Bitcoin currency is intentionally deflationary. If Bitcoins become more and more adopted, while on the other hand the money supply faucet is gradually turned off, the Bitcoin exchange rate to the dollar can go nowhere but up. While the incredibly quick run-up to $266 in the second week of April was, in fact, a speculative bubble, a gradual rise in the value of Bitcoins is almost assured...

I recommend you read the whole thing.


1stepcloser's picture

confucius says "Those in the dark, never see black swan coming"

TPTB_r_TBTF's picture



if you see it coming,

then it ainT a black swan...

Bangin7GramRocks's picture

Big deal. Print more. Easy as pie. It will continue to work until it doesn't. And nobody but the big bank CEO's and the FED chairman know when that is. Enjoy life now!!!!!

Al Huxley's picture

Big fucking deal - they give $3 trillion to the banks, call it TARP or Chinese QE or whatever the fuck they want to call their gift to their financial class, and all's well.  The model's been pretty well established here, I don't see why anybody sees this as any kind of issue whatever.

Never One Roach's picture

Why would any Chinese pay a loan back? They take the money, move their family to Cali, launder their moollah in RE in Cali (or any other convenient foreign housing market--Sydney, Melbourne, London, etc) and then they leave the country shuting the door behind them.

Hasta luego, Baby!

element115's picture

Paging Dr Leo. Please pick up the white courtesy phone...

Pairadimes's picture

Bullish Soylent Green!

RagnarDanneskjold's picture

I thought Bloomberg was nixing all the negative stories. Not so much it seems.

Dagny Taggart's picture

Everyone needs some plausible deniability, even the Bloomberg puppets.

rosiescenario's picture

....even CNN once in awhile runs something negative on Obummer.....though most of their air time is devoted to the mayor of Toronto...

thunderchief's picture

But at the end of the day China still has 3 trillion in foriegn cash reserves, over a trillion is UST reserves and a export economy.  So worst case if every loan goes bust they can still come out even or better.  Sorry folks, as bad ast the air pollution is they are still better off than the USA.

Another thing.  All those filthy bankers will get bailed out at the nearest firing squad in China.

The Abstraction of Justice's picture

3 trillion that will never repaid. You really think the US gov is gonna honour them?

Matt's picture

You don't have to PAY your debts, you just need to SERVICE them.


LawsofPhysics's picture

One question I still struggle with, is my wife a debt to be serviced or not?  Sometimes she is an asset, sometimes a liability...

Zhanglan's picture

3 trillion? No, 4, surely. Or 5. Or 50. 500 maybe. Anyhow, really really bad. And you can't trust their data (except on the downside). And, like, Tibet and Tiananmen Square and shit


'Ho Lee Fook" ' "All Gon Wong" - my, how we laughed (until Mummy came and took us home from preschool)

Payne's picture

They have less bad debt than the West, they have the Gold and the Manufacturing base.  

Matt's picture

What do you base your assertion that they have "less bad debt" on?

joego1's picture

If capitalism fails in china they can always just hit the reset button and tell their population to eat shit. 

Hulk's picture

Where's Leo when you need him ???

rosiescenario's picture

The Great Leap Backward.........