China's Credit Nightmare Explained In One Chart

Tyler Durden's picture

Everyone knows that after years of kicking the can and resolutely sticking its head in the sand, China is finally on the verge, if hasn't already crossed it, of a major credit event, confirmed by the first ever corporate bond default which took place a week ago. Few, however, know just why China is in this untenable position. If we had to select one data point with which to explain it all, it would be the following: just in the fourth quarter of 2013, Chinese bank assets rose from CNY147 trillion to CNY151.4 trillion, or, in dollar terms, an increase of almost exactly $1 trillion!

By comparison, US bank assets in the same period rose by just over $200 billion, a number which consists almost entirely of the reserves injected by the Fed.

And if we had to show it in one chart, it would be the following comparison of total Chinese and US bank assets: the two lines shown below are on the same axis, and at the end of 2009, the US had just a fraction more assets than China. Since then the US has added $2.3 trillion in bank assets, exclusively thanks to the Fed's reserve creation. As for China... total bank assets more than doubled from $11.5 trillion to a record $25 trillion! This is a number that is nearly double that of the US, and represents a pace of $3.5 trillion per year - or nearly four concurrent QEs - a rate of "financial asset" addition five times greater than in the US!


Another way of showing just the past three years:


What's worse: China is now hooked to a "flow" pace of $3.5 trillion each and every year, just to generate an annual GDP of about 8% and declining with every passing year. Any reductions in the pace of monetary flow will have magnified implications on China's growth, and from there, social, and globa, stability.

But what does this really mean? Simple: in this epic, unprecedented, feverish pace to "grow" the economy and create hot, if worthless, money out of assets, all assets, even "magic" assets (i.e. thin air), the following took place:

CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.

Until now nobody cared because defaults were prohibited in China and nobody really cared what was underneath the hood. Now, defaults are allowed and, in fact, are encouraged. Which is why suddenly everyone is starting to cast curious glances into the dark shadows where the engine is supposed to be.

They won't like what they find.

Curious for more: read Chart Of The Day: How China's Stunning $15 Trillion In New Liquidity Blew Bernanke's QE Out Of The Water, and Some Stunning Perspective: China Money Creation Blows US And Japan Out Of The Water

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Seer's picture

Thank you for helping make my point! (that there's a limit)

headhunt's picture

We are due for a world changing technological breakthrough

Seer's picture

Due?  As in deserve?

And, would this "breakthrough" be realized by all 7+ billion humans?  Or, would it be realized by only a handful of people (such has always been the case)? and if you weren't a recipient, would you still be excited about this "breakthrough?"

headhunt's picture

No one 'deserves' free stuff, 'due' as in there are a lot of smart people on this world working on crazy shit that will produce some breakthrough, intentional or unintentional, which will change the world.

As a consequence the likes of Putin and the Saudis will wither away over time. If the 'wrong' person invents 'it', wars will be fought over whatever 'it' may be.

In the meantime hold on - it's going to be fun.



caustixoid's picture

We are due for a world changing technological breakthrough

Reminds me of the Cheers episode where Sam goes broke and has to sell his precious sports car.  As he is required to turn over the keys he pulls away and says in a panicky voice.  "Wait!  I just need to invent a product America needs."

Time's up

myptofvu's picture

Ideologically its communistic, Economically its capitalistic.

Seer's picture

Bottom line: it's operating on the premise of perpetual growth on a finite planet, which = FAIL (sure, there will be good times and all, but the party ALWAYS ends, no matter the ideology)

headhunt's picture

If all your mentors are communist, so are you

Seer's picture

Hm... I've had atheist friends who grew up in Christian families: one even started working to become a pastor.

Once again, broad brushes never paint anything meaningful...

LawsofPhysics's picture

That's a lot of yuan (pronounced "yawn").

Carl Popper's picture

There is no way that degree of credit expansion was allocated efficiently.   There are trillions more in bonds that won't ever be redeemed. 


This should be interesting to watch. 


They will try a combination of monetization and default.  It is hard to walk that tightrope without falling off one side or another. 

debtor of last resort's picture

CP, markets will price in 80/20 default monetize ratio. Soon to be reversed in 95/5 through ctrl-p by the pboc? Because with 80/20 everything will collapse.

q99x2's picture

As long as they are consistent and devoted which it appears as if they are things should work out well based on that chart. By printing fiat and purchasing up the rest of the world with that fiat a group of people or a nation could take over the ownership of the world. The more you print the more you own. It works if you work it.

Yen Cross's picture

      Infographic time. What $1 trillion looks like.  Now multiply that by 25 and the shear insanity of central banksters comes to light...

DoChenRollingBearing's picture

+ $25 trillion.

For what that´s worth!

Dr. Engali's picture

Thank goodness we still have Africa to exploit. The world needs a few moar empty cities. They make great battle grounds for the zombie apocalypse. 

yogibear's picture

A race to the cliff.

Does China and Russia destroy the US economic system or the US destroy both China and Russia's economies?

Both Japan and the US are also the credit junkies livivg on the street in poor health.

headhunt's picture

If US and Japan are credit junkies, China and Russia are crack ho's

Seer's picture

It's a global system, it all goes at the same time, roughly.

The only question is what each country's structure will look like/operate as when it all goes down.  Russia, US and Canada, the ones that'll be the places to be: ample resources, though consumption will be restrained (better a little than none).  And, given the large land masses of each, that it'll also come down to regional capabilities.  While the real estate sector should be wiped from our memories there's one valuable thing from it that we should  ever lose awareness of: Location, Location, Location...

B.J. Worthy's picture

Is anyone still using the words "soft landing?"

Dr. Engali's picture

Is this the flight 370 thread?

Seer's picture

It's now come down to just hoping that there'll be a "Landing."

Hohum's picture

Well, China has about 4x the number of people as the USA, so not much of a difference per capita.  Party on!

Panafrican Funktron Robot's picture

This is a good point.  Consider also that currency printed vs. GDP increase is virtually identical to the US.  They're just keeping pace with our relative rate of printing/real valuation.  People are also forgetting that defaults are occasionally allowed here to, when they are expedient for the strategy at hand by the controllers.

skins1's picture

Sum Ting Wong?

docmac324's picture

Gonna need a war to fix that.


Oh, wait....

rosiescenario's picture

1 trillion in the last 1/4 of 2013......that is a hard number to achieve it collateral must be re-cycled several times to new lenders.....obviously.

Smegley Wanxalot's picture

Once the shit hits the fan in China, they move on the Senkakus to drum up the nationalist fervor and shut down the complaints of the population, while Putin deflects the braindead DC fucktards in eastern europe. 

So China gets east Asia, Putin gets east Europe, and Obama gets put in his rightful fucking diminished place (still more than that cunt deserves).

Chewybunny's picture

The assumption would be that China would win the war?
Even if the US or any other nation will not intervene between the dispute between Japan and China, and they DO go to war...I believe Japan would win. China's greatest military asset (sheer manpower) is meaningless when it comes to Japan. The islands have never been successfully invaded, and every attempt has been met with death. Arguably one of the reasons we nuked them in the first place as a mainland invasion of Japan would have been blood-bath. The Chinese know it. They learned their lessons from their own actions, the Mongols' actions, and the US actions when it comes to dealing with a culture that is predominately militant at it's core (Japan).

Seer's picture

Japan, are you serious?

Ever consider Japan's invasion of China as a nice little rallying point?

Japan is stuck on its island.  Demographics already indicate its future.

The US won't have the will to engage in any Japan/China war: not unless this is the last war of "civilized" man- next war fought with sticks and stones.  And, really, the founders warned of mucking about in the affairs of others.

caustixoid's picture

Japan has the best-equipped military in Asia, and certainly the better navy.  China's trump cards are its huge army and nukes.   Any full-scale war would be unwinnable in the sense of total victory and occupation and unthinkable in terms of certainly setting off WWIII as Russia and the US protect their interests. 

However naval skirmishes?  limited battles?  Possible.  The wheels are coming off both their economies and the natives are going to get restless.   Could be a nice distraction.  As we saw when the Iraq War started, domestic dissent during war is mostly self-stifled, or otherwise crushed to popular opinion.

Hell if the leadership of the two countries were really smart they'd choreograph a little limited war - go back to 17th C. European rules of battle - set the time, have a nice breakfast, blow the horn to warn you're coming...  already have the peace terms signed giving China the islands and Japan drilling rights.  Win-win.


JimmyRainbow's picture

plz, i have only a few braincells,

why the hell is gold so cheap?

everyone wants it, it is sold in mega large amounts and the price declines

i mean what the heck could be the big plan behind this?

other metals price manipulated with warehouses

only gold going down all the time

something very very big has to be going on out of sight

Winston Churchill's picture

Bet you thought it was JPM keeping the paper gold price down ?

Surprise, its probably the PBOC so they can buy phyz cheap.

That games nearly over.

Seer's picture

"why the hell is gold so cheap?"

Because you've got a lot of currency? (remember: the overwhelming majority of humans live off of $3/day or less)

Gold is actually way "up" over what it was a few months back.

But, being a bit more academic, the USD is outlasting others' currencies (which are being driven into the ground in order to try and maintain their export market share).

eaglerock's picture

So, if the shit hits the fan in China will they offload their $1.2 trillion in US Treasury Bonds?  How will that impact us?

The Most Interesting Frog in the World's picture

In Chinese accent: Print more dollar dollar!

Winston Churchill's picture

By itself not much as the FedRes will print them up dollars.

If they sell those dollars, it will cause a stampede of $16 trillion dollars held overseas

to rush back to the US, causing hyperinflation within months.The greenback would be totally

worthless.China selling those UST's is the equivalent of shouting fire in a crowded theatre.

Seer's picture

Then we're completely on our own to finance our debts.  Certain end to any possibility for "growth."

B2u's picture

I asked a Chinese girl for her number.

She replied, "Sex! Sex! Sex! Free sex tonight!"

I said, "Wow!"

Then her friend said, "She means 6663629."

Seer's picture

And, well, did it end up being free?

Hayabusa's picture

At one point I considered learning the Chinese language - in preparation for their world economic takeover.  Not so much anymore... sometimes procrastination can be a good thing.

Seer's picture

My wife complains that I don't speak Tagalog.  I told her that since SHE can speak English then it's more important that I learn Diesel (learn about maintaining our truck and tractor).

I Walk the Talk, just don't kinow how to Talk it :-)

john milton's picture

Hey tyler or something, stop publishing these things and telling the truth, sheeple might belive it..

Chewybunny's picture

I'd like to know if there is anyone here who knows who pays for post-war damage?

China and Japan are at each other's throats, yet neither can afford the demographic hit a war will cause.

What DOES china stand to lose to a war? a bunch of empty cities suddenly getting bombed. So I am wondering, if China and Japan go to war it would probably mostly bombing runs and very little direct soldier on soldier combat. If Japan bombs a bunch of cities that we all know are empty, and there's nothing left of those, what happens to those unused assets? Are they still on China's books? 


Seer's picture

"If Japan bombs a bunch of cities that we all know are empty, and there's nothing left of those, what happens to those unused assets? Are they still on China's books? "

If they've actually learned from the pros in the US they'll locate their books in those cities.

Chuck Knoblauch's picture

Quiznos follows Sbarro into Chapter 11 Bankruptcy.

Brand name franchises are going out of business or downsizing in the US.

Keep pointing the finger at China and ignore your own problems. Laughing at the other guy as your boat sinks too.

Maybe you'll start taking it seriously when Papa Johns files under Ch. 11?

skwid vacuous's picture

Papa John's just doubled, shitty tasting pizza and all... QE special i guess

Hayabusa's picture

I'm fine with Papa John's going under... skwid is right, their pizza tastes like what I suspect shit tates like.  Who the hell is eating that crap anyway?!!?  Doubled, r u shitting me?