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China's Corporate Debt Hits Record $12 Trillion

Tyler Durden's picture





 

Remember these two charts?

From November 2012, The Chinese Credit Bubble - Full Frontal:

 

 

And from November 2013, "How China's Stunning $15 Trillion In New Liquidity Blew Bernanke's QE Out Of The Water"

 

 

It seems people are starting to listen, and not a moment too soon: as of December 31, China's corporate debt just hit a record $12 trillion. From Reuters:

China's corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults, as credit repayment problems rise.

 

Chinese non-financial companies held total outstanding bank borrowing and bond debt of about $12 trillion at the end of last year - equal to over 120 percent of GDP - according to Standard & Poor's estimates.

 

Growth in Chinese company debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 percent, from 1.82 trillion yuan ($298.4 billion) to 4.74 trillion yuan ($777.3 billion), between December 2008 and September 2013.

 

While a credit crisis isn't expected anytime soon, analysts say companies in China's most leveraged sectors, such as machinery, shipping, construction and steel, are selling assets and undertaking mergers to avoid defaulting on their borrowings.

 

More defaults are expected, said Christopher Lee, managing director for Greater China corporates at Standard and Poor's Rating Services in Hong Kong. "Borrowing costs already are going up due to tightened liquidity," he said. "There will be a greater differentiation and discrimination of risk and lending going forward."

And then there was the worst capital misallocation in history:

Exacerbating China's corporate troubles has been the questionable use of 4 trillion yuan in stimulus that Beijing pumped into the economy following the onset of the global financial crisis in 2008, explained Lee of Standard & Poor's.

 

"Many companies invested heavily into competitive and low-return projects because funding was readily available," he said. "These investments aren't doing well and are making little contribution to profitability."

Of course, there is also this:

And this:

What happens next as the Chinese perfect debt storm is finally unleashed? Read this for the upcoming next steps: '"The Pig In The Python Is About To Be Expelled": A Walk Thru Of China's Hard Landing, And The Upcoming Global Harder Reset "

 


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Tue, 02/25/2014 - 16:05 | Link to Comment pragmatic hobo
pragmatic hobo's picture

ho-li-shit

Tue, 02/25/2014 - 16:07 | Link to Comment knukles
knukles's picture

Mexico has Montezuma's Revenge
America has Cloward Piven's Revenge
China has Capitalista's Revenge

 

 

y'all get to the same pile of shit, regardless of nomenclature

Tue, 02/25/2014 - 16:20 | Link to Comment TruthInSunshine
TruthInSunshine's picture

Boom!

And it's not just Chinese corporations - and this will be discovered soon during the next "stawk market" implosion, and it will ne declared that NOONE COULD'VE SEEN IT COMING!!

Check out the outstanding debt levels of U.S. publicly traded corporations, or U.K. ones, or Japanese ones, etc.

Corporate share buybacks; where money borrowed cheaply (thanks, Bernanke!) goes to temporarily lift share prices, inflate executives' shared-based incentive pay packages, and then die.

Tue, 02/25/2014 - 16:28 | Link to Comment zaphod
zaphod's picture

The Chinese know that it is all paper funny money that will blow up at some point, so why not take advantage of the nonsense system to build infrastructure and buy gold. 

Remember, they are at the same time buying the next version of money (gold) while at the same time benefiting from the collapse of the current system (debt)

Tue, 02/25/2014 - 17:55 | Link to Comment Georgia_Boy
Georgia_Boy's picture

Then when the bad loan crisis hits, they'll be selling assets off to raise money. Maybe gold or maybe not, but those houses in Canada and Cali supporting the putative recovery? Dumped. They're following in the Japanese footsteps pretty closely so far.

Tue, 02/25/2014 - 18:24 | Link to Comment max2205
max2205's picture

Looks like if they can kick the can past this Oct they might make it through

Tue, 02/25/2014 - 16:32 | Link to Comment SAT 800
SAT 800's picture

does this mean they're winning ?

Tue, 02/25/2014 - 16:58 | Link to Comment TheReplacement
TheReplacement's picture

The west is racking up debt to pay for debt.  The Chinese are racking up debt to buy land, gold, resources, and other stuff.  When the reset happens possession will be 9/10s and they will possess.  If that fails, they have a billion sreaming Chinese to throw at the problem.

Tue, 02/25/2014 - 17:10 | Link to Comment dtwn
dtwn's picture

Well, perhaps not a billion, but a surplus of 30 million fighting age males 15-39:

By 2015 there will be approx 25 million more males than females aged 15-39

By 2020 this rises to approx 30 million

If China undergoes a hard landing you end up with 30 million fighting age males with limited job prospects and limited heterosexual relationship prospects.

So, wat do with 30 million excess males?  War is the easy answer.

Demographic stats from here:

http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTHEALTHNUTRITIONANDPOP...

Tue, 02/25/2014 - 17:29 | Link to Comment TruthInSunshine
TruthInSunshine's picture

The difference this time is that western consumers, especially in the U.S. and U.K, have reloaded up on debt to new, record levels (high levels even excluding student loan debt), and this reloading of debt has occurred in a 2009 to 2014 economic environment that has seen stagnation, at best, and a decline, more likely, in real GDP, real wages, and an overall deteriorating economy.

Thus, Bernanke and his CB cohorts merely delayed the reckoning that should have taken full place and cleared the deck of the toxicity and sepsis back in 2008 to (?), thus making the final outcome, when things do fully clear, that much more painful. and you have a new, massive tranche of consumer debt that is EVEN LESS ABLE TO BE performed upon cleanly now than that which existed in 2008.

That corporate debt levels are as high as they are is also largely attributable to Bernanke and his fellow CBers suffocating interest rates, which merely encouraged the likes of IBM (who announced 13,000 layoffs today) to sell 3 year corporate bonds at a 1% yield, which is insane. I'd venture that most of the 1 billion USD bond IBM sold at that yield back in 2010 went to buy their own shares back (probably all of it).

Most people have no clue how badly the CBers broke the economy, but it will all come out in the wash.

Tue, 02/25/2014 - 18:55 | Link to Comment Oldwood
Oldwood's picture

All we can hope for now are aliens from outer space to come buy up all of our bad debt. Maybe Goldman and JPM can start blasting SETI type transmissions into outer space pushing their "securitized" assets for sale.

On another point, how did the term "securitized" ever come to pass when so many of them seem anything BUT secure?

Tue, 02/25/2014 - 19:57 | Link to Comment chindit13
chindit13's picture

Excellent. I don't know why this issue hasn't been discussed more. It is something right in the wheelhouse of a guy like Jim Grant.

By fixing the price of money at a false level, Bernanke changed the entire process behind corporate capital structure. What is the EPS? What is the market multiple? What is the cost of funds? For many firms---especially if the CEO is bonused in certain ways---factoring in those inputs leads to a single conclusion: Borrow and Buyback.

Take it to its logical conclusion, and "old business" is increasingly debt (not equity) based, which forces external equity investors into IPOs of pie-in-the-sky companies like social networkers. When lots of camels are trying to fit through the eye of a needle, equity indices soar...on the back of nothing except the false pricing of money. No wonder Amazon doesn't need earnings....now.

Yes, maybe it's a subtle difference in terms of what has already been stated regarding the dangers of ZIRP, but it's still an important additional problem.

Tue, 02/25/2014 - 20:48 | Link to Comment thestarl
thestarl's picture

I know of young couples leveraged to their eyeballs in the Australian residential property market in most cases with interest only loans in the false belief of never ending increasing property valuations.Of course the insane government negative gearing policy over the years has encouraged this but to me this is nothing more than misallocated capital not productive and it will end badly.

You know TIS the really sad part about it is that these couples have absolutely no idea of how really fucked they are,in some cases combined incomes in excess of 250k but debt obligations north of six figures surviving said obligations on a week to week basis working combined 140 hours plus a week.I feel Steve Keen will be vindicated in the not to distant future.

Tue, 02/25/2014 - 20:18 | Link to Comment chindit13
chindit13's picture

China already has its meme, from the new and improved version of Mao's Little Red Book:

"To bugger thy comrade is glorious"

Tue, 02/25/2014 - 16:07 | Link to Comment HyBrasilian
HyBrasilian's picture

Owed 2 who[m]? ~ FUCK DEBT... [ESPECIALLY those who printed it, & LEVERED IT out of thin air]...

Tue, 02/25/2014 - 18:26 | Link to Comment max2205
max2205's picture

The price of pussy must be sky high.....too many Yuan chasing too few pussy

Tue, 02/25/2014 - 16:08 | Link to Comment NOTaREALmerican
NOTaREALmerican's picture

Yabut...  who's counting.

Tue, 02/25/2014 - 16:08 | Link to Comment pods
pods's picture

Asian Tiger is just churning along, nothing to see here.

Is it sunny in China today, or smoggy?

Orientals are putting the west to shame when it comes to borrowing money!

pods

Tue, 02/25/2014 - 16:09 | Link to Comment Carpenter1
Carpenter1's picture

Make it 12 octillion, nothing matters anymore.

Tue, 02/25/2014 - 16:11 | Link to Comment trader1
trader1's picture

more doom porn...

fuck!

Tue, 02/25/2014 - 16:17 | Link to Comment nightshiftsucks
nightshiftsucks's picture

So who's buying all of those assets,and where is the money coming from ?

Tue, 02/25/2014 - 16:25 | Link to Comment g speed
g speed's picture

the 64 thousand dollar Question??  as in if China is owning the US then who is owning China???

Tue, 02/25/2014 - 16:29 | Link to Comment NOTaREALmerican
NOTaREALmerican's picture

The smart-n-savvy are buying all the assets with borrowed money.

How do they get to borrow so much money?

They have lots of past success at increasing their wealth by borrowing money.

What if they can't repay the money?

They'll borrow more money to repay the previous loans.

Why would anybody loan them money to do that?

They have lots of past success at increasing their wealth by borrowing money.

What if they can't repay the money?

They'll borrow more money to repay the previous loans.

Why would anybody loan them money to do that?

They have lots of past success at increasing their wealth by borrowing money.

What if they can't repay the money?

They'll borrow more money to repay the previous loans.

Why would anybody loan them money to do that?

Tue, 02/25/2014 - 16:45 | Link to Comment Rainman
Rainman's picture

China's much-preferred shadow banking system has 30 Trillion yuan in loans outstanding

http://www.wnd.com/2013/04/chinas-debt-bomb-about-to-go-bang/

 

Tue, 02/25/2014 - 17:59 | Link to Comment Georgia_Boy
Georgia_Boy's picture

Money the rich chinese are sucking out of the economy and moving overseas any way they can. I think if everyone magically stopped playing the currency wars and just went free market (right), the yuan would fall, not rise.

Tue, 02/25/2014 - 19:06 | Link to Comment Oldwood
Oldwood's picture

If everyone only purchased what they had cash money for, the economy would be dead by the end of the week. The only economy we have is based on borrowed money. Money that doesn't even exist, it is created. And we thought God was almighty. I would imagine that if all debts were reconciled against existing capital, there would be no money left. Todays greatest value of currency is that it provides a measure of relativity as to how fucking broke we really are. Without money we would be poor, but with a fiat currency existant in our minds, it puts a number to it. We are 17 trillion dollars in debt, just for our part of what the government has pissed away. We can't pay that back.

Tue, 02/25/2014 - 16:20 | Link to Comment LawsofPhysics
LawsofPhysics's picture

The chinese are great at copying ... if the Fed can print pretty pieces of paper from thin air and buy real assets, by God you can bet the Chinese will take it to a whole new level...

Tue, 02/25/2014 - 16:30 | Link to Comment Skateboarder
Skateboarder's picture

I don't know about pretty... :)

My Persian friend's mom went to visit Iran recently. It seems like the new Monopoly-looking 100 dollar bills are not being accepted by locals there at the moment (older bills are fine).

Tue, 02/25/2014 - 16:30 | Link to Comment Kayman
Kayman's picture

Fractional Reserve banking to the moon and beyond ! As you let your equity approach the zero bound your returns rise to infinity.  How can you lose ?

Tue, 02/25/2014 - 16:30 | Link to Comment Rudini
Rudini's picture

How much is coin and how much is warehouse receipts and such? My hunch is it's mostly warehouse receipts. Kinda like barter. So if this $12 beeeelion of debt goes kaplewy it can not have the same effect as $12 beeeelion in coin. The same applies to their real-estate - you know, those ghost cities. Very little debt on them. Not the same leverage as 10% down. Just sayin'.

Tue, 02/25/2014 - 16:32 | Link to Comment NoDebt
NoDebt's picture

They got this, OK?  They got it.  You know you MUST believe in these all-seeing bankers or something bad will happen.  Once overheard on Wall St. once: 

"Ray, the next time somebody asks if you are a God, you say YES!!"

And then the 50 foot Stay-Puft Marshmallow Man shows up to stomp everyone's stocks and bonds into oblivion.

 

Tue, 02/25/2014 - 17:02 | Link to Comment TheReplacement
TheReplacement's picture

Consider that these people (bankers) virtually control the world economy and the printing presses, it is possible they will pull it off.  Granted it will probably take lots of bullets and bombs but they just might squeek this one by.

Tue, 02/25/2014 - 16:34 | Link to Comment SAT 800
SAT 800's picture

Speaking of the Devil; the stock market is starting to look like a short again; if it can't make a new high, it's not a bull market; and also; whatever doesn't go up, does go down.

Tue, 02/25/2014 - 16:44 | Link to Comment Kirk2NCC1701
Kirk2NCC1701's picture

One man's Debt is another man's Asset.

Control the Debt, control the Debtor. 

= Modern-day slavery/feudalism.

Tue, 02/25/2014 - 16:39 | Link to Comment Droid Fuel
Droid Fuel's picture

I like Thai food.

Tue, 02/25/2014 - 16:55 | Link to Comment Kirk2NCC1701
Kirk2NCC1701's picture

I agree with Michael Palin:  I like Chinese (Wo, ai zhong guo ren).

http://www.youtube.com/watch?v=K6atKa8d3Sw

Lyrics:

The world today seems absolutley crackers,
With nuclear bombs to blow us all sky high.
There's fools and idiots sitting on the trigger.
It's depressing, and it's senseless, and that's why...

(singing)
I like Chinese,

There's fourteen hundred million of them in the world today,
You'd better learn to like them, that's what I say.

I like Chinese food,
The waiters never are rude,
Think the many things they've done to impress,
There's Maoism, Taoism, Eging and Chess.

I like their tiny little trees,
Their Zen, their ping-pong, their ying and yang-eze.

I like Chinese thought,
The wisdom that Confusious taught,
If Darwin is anything to shout about,
The Chinese will survive us all without any doubt.

Wo, ai zhong guo ren,
Wo, ai zhong guo ren,
Wo, ai zhong guo ren,
Ni hao ma, Ni hao ma, Ni hao ma zai jian.

I like Chinese,
I like Chinese,
They're food is guaranteed to please,
A fourteen, a seven, a nine and leeches

 

Tue, 02/25/2014 - 16:59 | Link to Comment pragmatic hobo
pragmatic hobo's picture

no wonder chinese are paying over-the-top dollars to buy properties in the usa and in britain ...

Tue, 02/25/2014 - 17:38 | Link to Comment ilovemilken
ilovemilken's picture

You can buy a lot of General Tso's chicken for $12 trilliion.

Tue, 02/25/2014 - 19:55 | Link to Comment OC Money Man
OC Money Man's picture

Published in Breitbart and American Thinker this week:

China’s Economic Bubble Is Bursting


The highly credible
HSBC/Markit Purchasing Managers' Index (PMI) of economic demand in China reported that demand in China’s factories fell for a second month in a row and hit a seven month low.  Markit Research also reported that production volume turned negative for the first time in seven months and hiring expectations fell to a five year low.  Although the Chinese government continues to produce an array of rosy economic statistics each month, China’s industrial competitiveness is fading fast.  Coupling production contraction with banking problems and a fall in employment to a five year low, it appears that China’s economic miracle may just be a speculative bubble that is about to burst.    

Markit Research compiles “flash” indicators each month for demand and operating conditions in China’s manufacturing sector.  The report is based on surveys responses from executives inside approximately 85%–90% of China’s most important factories.  A Markit flash score above 50 means that activity is expanding, whereas a score below 50 means that activity is contracting.  Although the final reports are not published for another two weeks, the Markit flash reports seldom differ from the final reports.   

The Chinese Lunar New Year festival began this year on January 31 and most workers went on vacation back to their family home to celebrate for two weeks.  Consequently, the level of economic activity during the lunar holidays is an excellent indicator of the strength of domestic consumer demand.  The purchasing managers’ index falling from a weak 49.5 in January to a seven-month low of 48.3 in February is a strong warning that the accelerating contraction in demand is being driven by weak domestic consumption.

Former Chinese President Hu Jintao and Premier Wen Jiabao in 2010 published “Report on the Work of the Government” and report of the National Development and Reform Council (NDRC) that formed the basis of China’s Five Year Plan for 2011-2015.  The Plan discarded the centrally planned economic model of emphasizing export manufacturing for the past three decades.  The new Plan focused the nation’s economic and development on centrally planned efforts to build a modern consumer economy. 

The main features of the new policy were converting China from being the “world’s manufacturer” to becoming the “world’s consumer”; upgrading its scientific and technological capabilities with an emphasis on innovation; expanding educational coverage; and increasing wages and living conditions in the rural areas.

Over the next five years, China’s implemented “new measures” that included widespread property tax changes that converted agricultural land into housing developments.  State-owned-banks were commanded by central planners to increase lending $15 trillion in just five years, twice the entire Chinese annual gross domestic product (GDP).  As a result, housing prices soared in major cities like Beijing from an average of $1,150 per square meter in 2005 to $11,400 per square meter by 2013.  Condos that sold for $3,500 in 1994 are now listed for sale at $833,000. 

But over the last six months, real estate demand and prices have been contracting faster in cities beyond the nation's relatively wealthy "first-tier" metropolises of Beijing and Shanghai.  According to the Securities Times newspaper, housing developers in the industrial city of Hangzhou outside of Shanghai cut prices this week by an average 19% in a scramble to sell about 120,000 newly built apartments.  The current inventory of new, unsold units in the city now exceeds the total number of housing units offered for sale in Beijing and Shanghai combined.  A study by Shanghai's Tongji University said real estate has been especially shaky in the northeastern city of Wenzhou, where new-home prices have fallen every month for the last two years.

The borrowing binge in China was not just restricted to state-owned-banks; approximately $3.5 trillion in private loans were also made by individuals to small companies at up to three times the interest rates banks charged.  Many of these loans went to shady business operators who bought coal mines to speculate on the growth of China’s electricity demand.  But most of those loans are now insolvent as the economic slowdown has caused the price of coal to be cut in half last year.  

Facing liquidity shortfalls as interest payments on long term loans have shriveled; Chinese banks over the last six months have been forced to borrow huge amounts of short-term money from foreign banks.  The Sunday edition of London's Daily Telegraph published a story that, “Currency crisis at Chinese banks could trigger global meltdown”.  The article warned that short-term foreign currency borrowing by Chinese companies has almost quadrupled in just four years to more than $1 trillion.  “Any substantial appreciation of the US dollar – and many analysts are indeed expecting gains this year – could open up a dangerous cross-currency mismatch, forcing Chinese borrowers to default and inflicting shattering losses on international lenders.” 

According to Beijing's State Administration of Foreign Exchange, at the end of 2013 China had foreign liabilities of a stunning $3.85 trillion; roughly 40% of total GDP.  The bulk of those liabilities consist of $2.32 trillion of highly illiquid foreign investments in factories and equipment.  Another $374 billion is foreign investments in China’s stock and bond markets.  Most foreigners assume they can sell and take money out of China; but the “Qualified Foreign Institutional Investor Program” strictly limits on the size and frequency of withdrawing money from China.   

The contraction of HSBC/Markit Purchasing Managers' Index to 48.3 during China’s biggest annual holiday seems dire when coupled with the PMI's Employment Index fall for a fourth month in a row to 46.9, its lowest point since the depth of the financial crisis in February 2009.  Over the last five years, Chinese central planners drove GDP per capita from $2,204 to $3,348, the fastest expansion of any large economy in the world. 

The Chinese Communist Party leadership would obviously like to continue to inflate China’s economic bubble with more lending.  But with banks facing massive loan losses and scrambling for short-term funding just to survive, central-planners now seem powerless to prevent China’s economic bubble from bursting.            

 

The author welcomes feedback @ chriss@chrissstreetandcompany.com
Chriss Street is teaching microeconomic at University of California, Irvine this spring from March 31 – June 8, 2014.  Call Student Services at (949) 824-5414 or visit 
http://unex.uci.edu/courses to enroll! 

Tue, 02/25/2014 - 20:14 | Link to Comment chindit13
chindit13's picture

Debt to build cities in which nobody lives. Debt to build factories whose production is unneeded...except to build more cities in which no one will live. Debt to secure access to external resources, the contracts/treaties surrounding which will be abrogated by a local despot/ruler in the name of nationalization.

Other than pollution, all that debt seems to have gotten China a handful of nothing. So much for the (false) meme of China taking the "long term view".

Carlin/Butler/Satoshi---101/401/411/911 isn't around to tell us what they'll sell when repayments are demanded in ways reflecting local cultural practices, but unlike the Japanese of the 1990s, I don't think it will be the foreign real estate holdings in bugout zones that will be put up.

Tue, 02/25/2014 - 23:11 | Link to Comment AdvancingTime
AdvancingTime's picture

Fast growth tends to mask flaws and weakness within a system, and China has been growing like a weed for years. To make things worse many of the investment decisions were driven by politics. This has created massive overcapacity. Money has been poorly allocated and often shoveled into deep holes like ghost cities and bridges to nowhere.

While the government does not have massive debt the companies in China do and their ownership is often intertwined with the state. China is on the edge, more details about the overcapacity and debt that overhangs their economy in the post below.

http://brucewilds.blogspot.com/2013/11/china-land-of-overcapacity-and-de...

Do NOT follow this link or you will be banned from the site!