Beijing's Tepid Efforts To Slow The Credit Boom Are Springing Giant Leaks

Tyler Durden's picture

Submitted by David Stockman's Contra Corner

Zaitech With A Chinese Accent: Beijing's Tepid Efforts To Slow The Credit Boom Are Springing Giant Leaks With Classic End of Bubble Earmarks

China is a case of bastardized socialism on credit steroids. At the turn of century it had $1 trillion of credit market debt outstanding—-a figure which has now soared to $25 trillion. The plain fact is that no economic system can remain stable and sustainable after undergoing a 25X debt expansion in a mere 14 years.

But that axiom is true in spades for a  jerry-built command and control system where there is no free market discipline, meaningful contract law, honest economic information or even primitive understanding that asset values do not grow to the sky. Nor is there any grasp of the fact that the pell-mell infrastructure building spree of recent years is a one-time event that will leave the economy drowning in excess capacity to produce concrete, steel, coal, copper, chemicals and all manner of fabrications and machinery, such as backhoes and cranes, which go into roads, rails and high rises.

The borrowing, building and speculating mania in China has obviously gotten so extreme that even the new regime in Beijing has been desperately trying to cool it down. But this will end up as a catastrophic failure—not the “soft landing” brayed about by Wall Street bulls who do not have the slightest comprehension of the difference between free market capitalism and the phony “red capitalism” that has been confected by the party-controlled apparatus of the massive, intrusive, bureaucratic and hierarchically-driven Chinese State.

At bottom the fatal error among China bulls is the failure to recognize that the colossal boom and bust cycle that China is undergoing is not symmetrical. The much admired alacrity by which the state guided the export boom after 1994 and the infrastructure boom after 2008 is not evidence of a superior model of governance; its only proof that when credit, favors,  subsidies, franchises and speculative windfall opportunities are being passed out freely and to everyone, when there are all winners and no losers ( e. g. China’s bankruptcy rate has been infinitesimal), a statist regime can appear to walk on water.

But what it can’t do is walk the bubble back to stable ground. The boom phase unleashes a buzzing, blooming crescendo of enterprising, investing, borrowing and speculating throughout the population that cannot be throttled back without resort to the mailed fist of state power. But the comrades in Beijing have been in the boom-time Santa Claus modality for so long that they are reluctant to unleash the economic gendarmerie.

That’s partly because their arrogance blinds them to the great house of cards which is China today, and partly because they undoubtedly understand that the party’s popularity, legitimacy and even viability would be severely jeopardized if they actually removed the punch bowl.  Just look at the angry crowds which mill about when a bankrupt entrepreneur skips town and locks up his factory sans all the equipment; or when developers are forced to discount vastly over-priced luxury apartment units they sold to middle class savers/speculators; or when banks attempt to disavow repayment responsibility for “trust products” they sold out the backdoor through affiliates; or the growing millions of rural peasants who have been herded into high-rises without jobs after their land was expropriated by crooked local officials and developers trying to make GDP quotas and a quick fortune, respectively.

In short, the Chinese population “can’t handle the truth” in Jack Nicholson’s memorable line. They by now believe they are entitled to a permanent feast and have every expectation that they party and state apparatus will continue to deliver it. As a result, Beijing has resorted to a strategy of tip-toeing around the tulips in a series of start and stop maneuvers to rein-in the credit and building mania.

But these tepid initiative have pushed the credit bubble deeper into the opaque underside of China’s red capitalist regime, meaning that its inherent instability and unsustainability is being massively compounded. The billiard balls that have been bouncing around the table since Beijing attempted to throttle lending by the Big State banks a few years ago provides a dramatic example.

In round one the big banks attempted to avoid credit growth ceilings by taking a leaf out of Citigroup’s playbook, and opened up back-door affiliates which operated off-balance sheet in the world of so-called shadow banking. These affiliates peddled “trust products” which were essentially high yield CDs that returned double or triple the regulated ceiling on regular bank deposit accounts. And how were these  back door affiliates to earn a profit when paying say 12% for funds? No problem!  The loan departments of the big state banks kindly referred their shaky credits and borrowers desperately underwater to their back-door affiliates who then presented such dodgy supplicants with an offer they couldn’t refuse.–namely, 20% money for 12 or 24 months as an alternative to being shut-off by the parent bank

So the credit house of cards was just enlarged, extended and riddled with more repayment cliffs just around the next corner. From a standing start in 2010, trust product loans and other shadow banking credit extensions have exploded to upwards of $6 trillion.

But here’s the thing. The credit bubble is now migrating into the land of zombie borrowers such as coal mine operators who have always been heavily leveraged but now face plummeting demand and sinking prices owing to Beijing’s unavoidable crackdown on pollution and the rapid slowing of the BTU-intensive industrial economy. Moreover, the $6 trillion in shadow banking loans are the opposite of long-term debt capital: they are ticking time bombs in the form of 12-24 month credits that are being accumulated in a vast snow-plow of maturities that will only intensify the eventual crisis.

To be sure, the state banking regulators have belatedly launched a campaign to crack-down on the explosion of shadow banking loans, but already the proof of the inherent asymmetry in China’s bubble/bust cycle is in. New credit extension is now migrating to the last refuge of an aging bubble–namely, non-financial corporations are plowing vast sums of cash into speculative lending. As the following excerpts from the Wall Street Journal show, such lending has now reached epidemic proportions, and is a direct rebuke to the tepid and well-telegraphed efforts of Beijing to rein in China’s monumental credit bubble:

These company-to-company loans, known as entrusted lending, have emerged as the fastest-growing part of China’s shadow-banking system, which provides credit outside of formal banking channels.The increase in entrusted loans last year was equivalent to nearly 30% of local-currency loans issued by banks—almost double the portion in 2012. The jump is all the more pronounced since China’s total social financing, a broad measure of overall new credit, shrank 561.2 billion yuan over the same period, largely because other forms of shadow credit declined as Beijing sought to rein in runaway debt growth.


The modern world of debt-besotted economies and central bank printing press dominated financial systems resolutely refuses to heed the lessons of history. But in the case of China’s new up-welling of “entrusted lending” by commercial and industrial firms, the lessons are plain as day. During the final blow-off phase of the US stock market in 1928-1929, for example, margin lending nearly doubled from 5% to 10% of GDP in 12 months and the vast proportion of that expansion came from business corporations speculating with excess cash—much of it raised on the stock market!

Even more to the point is the even crazier bubble blow-off in Japan during 1988-1990, which was given the name Zeitech for financial engineering. In that case corporations raised massive amounts of cash in the convertible preferred and bond market and cycled it back into the stock market on its way to 50,000.

Today the denizens of Red Capitalism are just practicing Zeitech with a Chinese accent.  The big non-financials are converting their cash—which should be saved for a rainy day—and their preferred access to loans from the big state banks into poker chips for speculation in a vast junk loan market that is desperate for cash. When the state runs out of will or capacity to prop-up what will be a cascading spiral of defaults in the so-called SME (small and medium enterprise) sector, the thundering crash which ensues will make the Japanese melt-down look like a Sunday School picnic.

It is then that the mailed fist of the state will be called into play; the economic gendarmerie will be unleashed by the desperate comrades in Beijing; the show trials against corrupt enemies of the state will proliferate; and the streets will be filled by the masses deprived of their putative entitlement to a permanent prosperity party.

Needless to say, then, too, the Chinese growth machine will come to a screeching halt.The China Miracle will be exposed. It never was one.


BEIJING—With credit tight in China, companies in industries beset by overcapacity are turning to an unconventional source for cash—other companies—in a new rising risk for the country’s financial system.


These company-to-company loans, known as entrusted lending, have emerged as the fastest-growing part of China’s shadow-banking system, which provides credit outside of formal banking channels. Net outstanding entrusted loans increased by 715.3 billion yuan ($115.4 billion) in the first three months of 2014 from a year earlier, according to the most recent data from China’s central bank.


The increase in entrusted loans last year was equivalent to nearly 30% of local-currency loans issued by banks—almost double the portion in 2012. The jump is all the more pronounced since China’s total social financing, a broad measure of overall new credit, shrank 561.2 billion yuan over the same period, largely because other forms of shadow credit declined as Beijing sought to rein in runaway debt growth.



The growing popularity of such company-to-company lending offers a fresh—and to regulators, troubling—look at the rapid buildup of debt in China. In its latest report on the country’s financial stability, issued Tuesday, the central bank singled out entrusted lending as a problem, saying it is being used by banks to evade regulatory restrictions on lending. Banks, while generally not risking their own capital directly, act as middlemen in these transactions.


China’s debt levels have climbed in recent years at a pace similar to increases in the U.S., euro zone and South Korea before those economies fell into their most recent recessions. The concern among some economists and analysts is that debt will continue to balloon in China, exposing the country to greater financial risks as its economy slows down.


Officials at the People’s Bank of China, the central bank, have warned that much of the intercompany lending is flowing to sectors where the regulators have urged banks to reduce lending: the property market, infrastructure and other areas burdened by excess capacity. In central Shanxi province, 56% of entrusted loans in the past few years have gone to power producers, coking companies and steelmakers, among others, according to a recent paper byYan Jingwen, an economist at the PBOC.


Access to entrusted loans allows struggling companies to hang on longer than they otherwise could, delaying the consolidation that the government and some economists say is needed in a swath of industries.


Big publicly traded companies with access to credit—such as the shipbuilder Sainty Marine Corp., China Shipbuilder  and specialty-chemicals producer Zhejiang Longsheng Group      —are among the most active providers of entrusted loans. These companies, instead of investing in their core businesses, lend funds at hand to cash-strapped businesses at several times the official interest rate.


Companies provide funds to make the entrusted loans. To get around an official ban on direct lending to other companies, they need to use an intermediary—typically a bank—to lend the money out.


Banks, which in theory shouldn’t use any of their own funds in the process, make money by charging fees to both the lending company and the borrower, and they don’t have to record the loans on their balance sheets. However, in practice, some banks have disguised loans made with their own capital as entrusted loans, thereby helping them skirt regulatory limits on lending, according to officials at China’s central bank. That has helped banks hide “credit risks,” the PBOC said in the Tuesday report……


The People’s Bank of China European Pressphoto Agency

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Escrava Isaura's picture

Repost… Because it says everything that you need to know


Andreas Söderlund, at You Tube


More money = More debt, so using statistics and theories to "prove" that money makes the world better is either completely ignorant or propaganda.


GDP is linked to the exponential growth of the debt, which makes it a completely unreliable long-term measure.


A statistic approach ignores the elephant in the room: Banks controls the money, which controls the economy, which controls the politics.


Financial slavery is not a good thing. Ignoring how the money that drives the economy is created hides a crucial detail. And now we're at the end of the road, only one generation later.


Massmedia and growth propaganda is a candy filled with poison, which the world swallowed a while ago, and soon there will be consequences.


Borrowing means a different economic situation (work to pay your debts). Not to mention extremely time-limited, since we cannot have infinite growth in a finite world, which the interest-bearing debt requires.

svayambhu108's picture

At this point at least in financial terms the system is not able to react any more bad news, which means it cannot take negative feedback which might have stabilized the system.

That means there will be no more negative feedback, if not even the threat of a war with Russia didn't brought any negative feedback into the system, the system is incapable of taking negative feedback, which means that the system might crash.

And by the way they can't fake negative feedback at this stage because then they will crash the system themselves.

Welcome 2008 2.0 (my take is this could happen within two years)

fudge's picture

It's all good news today ;-)) .. but there's no 6 degrees of seperation in this world.


A pocket full of posies
Ashes! Ashes!
We all fall down 

Rubbish's picture

China got hard physical assets out of their printing, the US tends to only be able to generate GDP temporarily with theirs via the hand out programs. I think China can slowly destroy the debt while continuing their acquisition of world resources. Pretty good gig if you can get it. When Gold and minerals back the currency, they stabilize. They just need a little 3 card monte to get the focus off them and on the declining Dollar.

angel_of_joy's picture

What a load of BS !

All the Chinese government has to do is to default on bad debt. If that's going to cause some banks and companies to go belly up, well that's too fucking bad... for them. You can always take over their assets and start anew. Their people tend to invest in real estate, and save in gold. These are real assets, not worthless promises and pieces of paper. Their economy manufactures real stuff, stuff they sell in the entire world for any sort of money they choose to accept ! They have an educated and very laboriuos work force. I'm not too worried about their bubble, especially since they are ruled by a commie regime who could change the rules over night any way it wants to !

Compare that with America, which is exactly in the opposite situation, and see who has a better chance to survive, and in what conditions...

Incidentally, defaulting on bad debts and starting anew while maintaining a relatively balanced budget is exactly what America should do in order to avoid a total financial and societal collapse. Just don't hold your breath waiting for our elected "representatives" to do the right thing...

nightshiftsucks's picture

Yeah they sell stuff to the world for worthless fiat and they dont have many natural resources.

angel_of_joy's picture

You missed the part where they buy gold and oil for which they pay in worthless fiat.

China has plenty of natural resources. Coal, agricultural land, rare minerals are first to come to mind.

You should read some more...

LawsofPhysics's picture

"China has plenty of natural resources."-  So does America.  How many people do the two of them have to feed?

America has a strong Agricultural output and less than 400 million to feed. 

Now, tell me about China again...

America will also hard default as well, eventually, just like China.  Both are technically defaulting through direct monetization, in fact China is throwing around far, far, more paper promises than anyone else.

Critical thinking is not you strong suit.  Anyone can read propaganda.  Personally, I choose to spend my precious time in other ways.

NumNutt's picture

The US had a lot (probably even more then today) of natural resources during the Great Depression. Just because a country has them does not mean it's citizens can afford to purchase/produce products from them.  That being said check this link:

Scroll down on that page and take a look at everything they are buying from every other developed nation on the planet, China folds and it will toss a big cold wet blanket on the world economy. The last time I checked most of the world's economies were clinging on by the skin of their teeth....

angel_of_joy's picture

It's the balance that matters (current account).

Their, is positive...


Radical Marijuana's picture

The first two comments already summarized my views:

"Mass media and growth propaganda is a candy filled with poison, which the world swallowed a while ago, and soon there will be consequences."

"...they can't fake negative feedback at this stage because then they will crash the system themselves."

Human beings have developed a civilization based on backing up lies with violence, which primarily takes the form of organized crime controlling governments, which legalized private banks making the public "money" supply out of nothing as debts. That has been amplified trillions of times by progress in the technologies which enabled doing that MORE. China was forced to "modernize" by accepting that system from the Western Empires, and adopting that system on an even bigger scale than ever before.

China is taking over the "lead" in developing an economy which is based on fiat money financing the strip-mining of planet Earth. The human species generally behaves in ways which maximize the short-term benefits, while deliberately ignoring the longer term costs. Since the established systems are based on dishonesty backed up with violence, in order to maximize the short-term benefits of those most doing that, there is nothing that can operate effectively as "negative feedback" to diminish the longer term consequences of us eating that "candy filled with poison!" Collectively, we have already swallowed that, and there will soon be consequences. However, the established systems of legalized lies, backed by legalized violence, will NOT allow those consequences to operate as negative feedbacks, until the overall system gets driven out of control, into crazy chaos, when the debt insanities provoke corresponding death insanities.

A system based on making the public "money" supply out of nothing as debts is the triumph of organized crime controlling civilization, which means that everything done is based on enforced frauds, which is "candy filled with poison," which system will not allow any "negative feedbacks" regarding the radical truths about itself to be publicly recognized. It does not matter if a few, or even a few more, people begin to better understand those processes now, since there is nothing they could actually do to stop the runaway systems of enforced frauds from stampeding civilization to run into their walls of limits, and then bounce off the cliffs of psychotic collapses into chaos, which were the necessary result of organizing civilization on the basis of fundamentally fraudulent financial accounting systems, which were made and maintained by the best organized gangs of criminals controlling governments, in order to globally maximize the short-term benefits, while simultaneously maximizing the longer term costs.

The questions are how "long" is longer, and how "maximized" were the longer term costs? ... Of course, none of those questions ever mattered before, since the people who were the best at being dishonest, and backing that up with violence, were able to dominate society, and wiped out any significant opposition that was not controlled to go along with doing that. China is now "leading" the way in fraudulent financing based on strip-mining planet Earth, until that becomes physically impossible to continue ...  Since that globalized system is based on the triumph of the methods of organized crime, that globalized system has no practical ways to prevent itself from doing that.



strannick's picture

Fascist govt will sustain it

Leveraged Algorithm's picture

So this is really bulllish - right?

Deacon Frost's picture

The central bankers wherever they may be, think they can defer the debt at 0% interest and run the numbers to infinity and infinite future generations.

This is the plan.

Oracle 911's picture

In the effort of saving the Chinese economy, the Chinese gov will kill the US$ and Russia will be more than happy for providing them help.

The Chinese gov want print money, but don't want hyperinflation. The Russians want end the Kiev junta, but don't want the war. Solution?

Establish a new reserve currency, which will be the by whatever becked Yuan. How to do it?

Russia will demand payment in Yuan, in gold or in Ruble. Short nice clean cut where it hurts the American hegemony the most, on its wallet.

Question as feed for thoughts: In what currency are paid these subjects, Al Quaeda, Blackwater, Kiev junta etc. ?

I am Jobe's picture

Someone please tell the bald headed Mark Mobius how to goa bout fucking the Emerging markets. 

Quus Ant's picture


Hey you

don't you listen

this is not the end of it all

don't you see

it's a rhythm

take you where you really need to be

elwind45's picture

This way too easy! 25 very very large in a non convertable currency?

elwind45's picture

New and on bottom just like a first date with ZH

Fix-ItSilly's picture

China is "bastardized socialism"?  lol!  A kleptocratic dictatorship is now a form of socialism.  Is it any wonder the West has socio-political problems?

hairball48's picture

The bigger they are, the harder they fall.

I've followed Stockman since he was budget director in 1981. I like Stockman even if his prose is a bit over the top sometimes. He's fun to read.

Herdee's picture

All backed by the owning of U.S. debt and Gold.Wondering how it all plays into the coming global monetary reset.And what happens if they no longer want U.S. debt?Thet seem to always want gold.

elwind45's picture

I do feel for them somewhat because their shit is too cheap and we owe them?

Stuck on Zero's picture

Time to fan the flames of patriotism, national honor, war, and territorial imperative.  Watch out Taiwan.  Watch out Mongolia.  Watch out Japan.


Space Animatoltipap's picture

It's all just part of the US $ based WW ponzi scheme. Better have guns, food, water and gold & silver to survive what's coming.

Stockmonger's picture

All the Chinese need to do is make sure the government spends enough to keep aggregate demand up.  China can then levitate indefinitely.

hairball48's picture

"China can then levitate indefinitely."

Until they can't

Son of Loki's picture

The next Bust is Unpossible.

Jason T's picture

I graduated high school in 1996 .. in 1996, China has someting (pun)  like 1.1 million registered cars on the road.. in ALL of china.  Today, China sells over 1.3 million cars a month! 


The credit growth is proportionate to their economic growth to a large degree.

Radical Marijuana's picture

Yes, LetThemEatRand, that is a great graph showing exponential growth, which is something that the vast majority of human beings deliberately do not want to understand. That graph demonstrates how it is very slow at first, but then suddenly rockets upwards ... Meanwhile, almost all real world experiences with respect to populations that went through exponential growth shows they then run into real limits, and then, catastrophically collapse.

Since our economic system is based on the triumphs of fraud, financing the strip-mining of the planet, every kind of exponential growth curve like the one you linked probably have some phases of accumulating, and synergistically converging, catastrophic collapses coming at some point in the future. Although, THEORETICALLY, those growth curves MIGHT have leveled off more sanely, that optimistic view is based on deliberately ignoring how they were working in the first place, which was as based on the development of fundamentally fraudulent financial accounting systems, whereby the best organized gangs of criminals control the governments, and force everyone else to go along with those frauds. That system drives almost everyone to maintain attitudes of evil deliberate ignorance towards the mathematics of exponential growth.

hairball48's picture

"The credit growth is proportionate to their economic growth to a large degree."

Nonsense. You better go check your math

I graduated in 1966...back when they actually taught math.

LawsofPhysics's picture

And you are suggesting that this is sustainable or in some way a good thing?


Good luck with that.  I bat last motherfucker.

optioneer's picture

China is a case of bastardized socialism on credit steroids.

*The United States

Rising Sun's picture

fucking communists


what else is new


when you end up at the bottom of the lake China, take that fucker Barry with you.



oleander garch's picture

What is the source for total Chinese credit growth outside the state banking system?  These numbers are mere guesswork.  This is sort of like the CIA estimates of USSR economy in the 80s.  It is designed to achieve a goal ... then to justify the Reagan build up of the military and now to scare people into staying with the dollar.

Inthemix96's picture

That of which cannot be sunstained, wont.

And on a long enough timeline......

'Odious Debt'.


Ban KKiller's picture

Until something really changes, like a people's revolution, I will always think of China as a river of floating dead pigs. Hard to fathom that there is a country more corrupt than us. But then they have had 6000 years to work on it. 

christiangustafson's picture

Counting Stockman and the James Howard Kunstler, I can come up with two good Baby Boomers.

And my mom.  So that makes three.

Hail Spode's picture

Don't you just love a globally integrated economy with little to no firewalls?   Will the rot and corruption in our economy drag them beneath the waves or will theirs do it to us first?   In a global economy we are all chained together and the illusion of prosperity is only as strong as the weakest link!

Drifter's picture

I really don't understand all the China bashing. Their economy is in way better shape than ours. If their economy is growing, ours is stagnant. If their economy is stagnant, ours is shrinking. They export real stuff, we export debt. We're have the biggest govt debt on the planet, not them.

TrustWho's picture

Because, USA economy was the envy of the world in 1999. How little did American's know about the next 15 years in 1999?

nightshiftsucks's picture

And how do you know that Drifter,have you seen the real books ?

q99x2's picture

Nice article. A little cranky though.

cocky roach's picture

Good thing they're buying up all that gold. That's some sweet insurance in this bubbly world.

vyeung's picture

Is this suppose to be fact? I think everyone knows they have out of control shadow banking and monetary expansion that went wild when QE kicked in thanks to the cabal controlled chinese elite (over 1000 of them have been executed to date by Xi) But to state that China never experience massive economic expansion is both STUPID and MORONIC. Look at your stupid iPhone. That is made in Shenzhen by a Taiwanese manufacturer based there. Look at your clothing, Walmart, Costco, home furniture etc etc. Hey, if you have a Hublot, everything on that watch is made in China except the movement (I believe the 7750 parts are made there and then shipped to Switzland to install the auto-winder and then stamp Made in Switzland). Bloody everything is made there and you are telling me there was no major economic growth/miracle. The author never stepped outside of his living room and sure hell has never been to the mainland. To put simply - YOU KNOW JACK CRAP ABOUT CHINA.

They have a big problem to solve -> shadow banking and credit expansion issue. Its a real MAJOR problem, but your last statement "Needless to say, then, too, the Chinese growth machine will come to a screeching halt.The China Miracle will be exposed. It never was one."

Half blind man is worse than a person that is completely blind - Why, because the blind man won't pretend he can see.

AdvancingTime's picture

Corruption has been a huge issue within China for years now more problems are brewing. China has entered a great credit trap and is awash in overcapacity and debt. Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need.

After several years of growing debt concern is rising the whole unstable pyramid is about to come crashing down bringing China and possibly the global economy with it. This is not just about writing off a few bad loans. The shadow banking sector is so large that concerns exist about contagion and a domino series of defaults that might rack the economy as savers lose money. It is hard to predict just how bad things will get because the situation will be very hard to keep under control. More on this subject in the article below.

benqbiggis's picture

in this company-to-company loans are there fractional reserve system ? or these companies can print money like central banks ?