"China Has A Massive Debt Problem", And Why It Is About Get Much Massiver

Tyler Durden's picture

We’ve spent quite a bit of time recently discussing the fact that China faces tough choices as Beijing attempts to counter decelerating economic growth while maintaining a peg to what has lately been one of the world’s strongest currencies. With pressure coming from four consecutive quarters of capital outflows totaling some $300 billion, devaluation is a somewhat risky (if inevitable) proposition and so the PBoC has opted for interest rate and RRR cuts to keep liquidity flowing into the economy.

But even as the reserve requirement cut freed up more than a trillion yuan, policymakers must also grapple with competing agendas such as deleveraging a system that, as we exposed more than two years ago, and as Bloomberg now reports, is weighed down by a veritable mountain of debt. 

China has a $28 trillion problem. That’s the country’s total government, corporate and household debt load as of mid-2014, according to McKinsey & Co. It’s equal to 282 percent of the country’s total annual economic output.

President Xi Jinping’s government aims to wind down that burden to more manageable levels by recapitalizing banks, overhauling local finances and removing implicit guarantees for corporate borrowing that once helped struggling companies. Those like Baoding Tianwei Group Co., a power-equipment maker that Tuesday became China’s first state-owned enterprise to default on domestic debt.

 

Now hold that thought, and consider this: China’s also trying to prop up a $10.4 trillion economy that’s decelerating and probably will continue to do so through 2016, or so says the International Monetary Fund. The economy expanded 7 percent -- the leadership’s growth target for this year -- in the first quarter, the weakest since 2009 and a far cry from the 10 percent average China managed from 1980 through 2012.

 

Against this backdrop, a barrage of recent policy moves out of China in recent days comes into sharper focus. It also helps explain why various parts of the government don’t always seem to be working from the same playbook.

 

“There’s obviously a contradiction between attempts to deleverage the economy and attempts to boost growth,” said Dariusz Kowalczyk, a senior economist at Credit Agricole SA in Hong Kong.

As a reminder, Baoding Tianwei Group Co (mentioned by Bloomberg above) is a subsidiary of state-owned China South Industries Group, and so when Baoding Tianwei indicated it would likely come up short on $14 million in interest payments due Tuesday, many speculated the parent company would step in to support it rather than risk a panic triggered by the first bankruptcy from a state-backed borrower. Instead, China South Industries called the issue none of their concern, suggesting that going forward, Beijing will allow the market to play a greater role in shaking out excessive debt burdens. 

The country is also moving to curb the excessive margin debt that has helped fuel the country’s world-beating equity rally and is set to kick off a pilot program that will allow heavily indebted local governments to refinance their high interest loans (which total 35% of GDP) and save billions in interest expenses in the process (and which incidentally may eventually be part of the Chinese version of ECB LTROs). And that’s not all: 

Among regulatory overhauls in train is a deposit-insurance program and ending a cap on deposit rates that effectively subsidized credit and punished savers. The deposit-rate ceiling may be abandoned this year and deposit insurance, a vital prerequisite, is scheduled to start May 1.

 

Putting depositor safeguards in place would allow for bank failures without stoking the kind of panic that spurred almost 1,000 customers to rush to outlets of Jiangsu Sheyang Rural Commercial Bank last year amid rumors the lender might go bust.

 

Moving toward a financial system where risk is more accurately priced and defaults tolerated is also crucial to the government’s fiscal overhaul of debt-besotted local governments...

 

All this explains why cleaning up the debt mess matters. With $3.73 trillion in foreign currency reserves, China has the financial resources to handle any future bank bailout or economic stimulus if need be.

 

Even so, if borrowing levels keep rising, at some point the country’s ability to both roll over existing credit and fund new projects will get tapped out. That’s not a good place to be for a one-party state with huge inequality and still-considerable development needs.

So in summary, China’s deleveraging efforts have the potential to work at cross purposes with Beijing’s desire to keep liquidity flowing and keep the economic machine from shifting further into low gear, but as Reuters notes, the PBoC is set to remove a bureaucratic hurdle from the ABS issuance process, which means that suddenly, trillions in loans which had previously sat idle on banks’ books, will now be sliced, packaged, and sold. This, in turn, will put in motion the classic securitization (non)virtuous circle in which banks offload credit risk to investors via ABS and, encouraged by the generation of securitization fees along the way, use their newly unencumbered balance sheet to make more loans to feed the securitization machine. This results, invariably, in shoddy underwriting as banks compete for business, and the amount of risk embedded in the financial system rises in lockstep with the percentage of securitizations backed by new loans to underqualified borrowers. 

Here’s more from Reuters on the PBoC’s new rules for ABS issuance:

Issuance of Chinese asset-backed securities (ABS) could triple to more than $160 billion this year, reactivating huge assets now mouldering on bank books, as Beijing streamlines procedures for firms to securitise receivables.

 

By making it easier for banks to repackage and resell receivables - such as loan repayments on mortgages, car loans and credit cards - the government hopes to free up banks' balance sheets so they can lend more to the real economy.

 

The People's Bank of China (PBOC) announced this month that regulatory approval will no longer be required to issue ABS, and issuers will now only need to register to do so.

 

Getting banks to lend more is a major policy goal, given banks have so far been reluctant to lend despite repeated exhortations from top officials. Even Premier Li Keqiang has called for banks to "activate existing assets," - which is where this securitisation push comes in…

 

Market players now expect ABS issuance to more than triple to 1 trillion yuan ($161 billion) this year, up from 300 billion yuan in 2014, which was in turn twice the total issued since 2005.

 

"There is a huge demand from banks alone to securitise assets," said Zhao Hao, economist at ANZ in Shanghai.

 

"General demand can easily push issuance value exceeding 1 trillion yuan ($161 billion) this year."

What this means is that China’s massive debt burden is about to get massiv-er, as banks use ABS issuance as a pressure valve to free up lending capacity. And as a reminder, here’s what will be going into the ABS collateral pools:

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Publicus's picture

Let me introduce you to the computer file holding those debts, and the edit button.

 

Money is nothing more than a game of monopoly, a game where we invent and reinvent the rules.

Captain Debtcrash's picture
Captain Debtcrash (not verified) Publicus Apr 22, 2015 6:21 PM

Exactly, don't you think we would take the single most important thing in our society a little more seriously. 

Beam Me Up Scotty's picture

Wait a minute.  I thought WE owed all of this so called debt that we have to China.....Thats what the TeeVee keeps saying.  Who does China owe?  Russia?  Israel?  The Fed?  The IMF?  I'm confused.  So its true.  Bankers create paper money or digital money and then everyone else borrows it to live, and then has to work their asses off to repay the interest on it.

How can everyone be in debt??

macholatte's picture

 

China has a $28 trillion problem.

 

Wake me when it gets to a gazzilion.

 

max2205's picture

I'll stick with that crappy dollar.....then switch to the peso.

edotabin's picture

Naturally, this article will be followed by 3 that tell us how the US is dead and how the AIIB is the best thing since sliced bread. Add in a bit of missile porn and we're good  to go!

kaiserhoff's picture

Lately all the rules have been changed by Jewish Banksters.

That isn't a good thing.

Publicus's picture

The only way to win their game is to not play.

kaiserhoff's picture

I'm voting with my check book for gold and silver,

  but we all have to play unless we can go way off the grid.  Easier said than done. A good direction, in any case;)

The idea that you can change the rules any time you want, is exactly what the Central Bankers believe.  How is that working for you?

iofera's picture
iofera (not verified) kaiserhoff Apr 22, 2015 6:48 PM

It's all a big conspiracy by Jews to ruin your life, isn't it, Bob?

Anything to avoid taking personal responsibility for your own failures and empty pockets, huh? :-)

Random's picture

If China is the world's exporter and was for the last 30+ years, where's the money you fucking jewish cock sucker hasbara cunt?

So, EU - Broke; US-Broke; Western World-Broke; Third world-Broke; China-Broke; Japan-Broke. Who owns all this debt you lying son of a bitch?

Cunt!

Main_Sequence's picture
Main_Sequence (not verified) Random Apr 23, 2015 6:17 AM

Although riddled with hatred and anger of exteme proportion, this was the funniest post I've read all day.

Captain Debtcrash's picture
Captain Debtcrash (not verified) Apr 22, 2015 6:20 PM

Ours is larger!!! US is over 60 trillion in total credit market debt.  USA! USA! USA!

bart12's picture

Not only larger but gowing faster with welfare and Obamacare liabilities adding in the last few years.

kaiserhoff's picture

China has a $28 trillion problem.

and god knows what, if anything, which is actually profitable.

As screwed up as the West is, there is still some useful data escaping the censors.  In China, not so much.

Ham-bone's picture

China is likely the last great real estate driven bubble...nearly all debt from here will be created by governments and corporations (taking advantage of ever lower rates to issue ever more debt)...financial and household debt growth will continue subisiding.

Still, China believes gold is money and have amassed quite a hoarde with some clear purpose in mind...the linked story discusses the dollars conversion into gold since '71 and who has been deemed important enough to utilize the conversion of dollars into gold.

http://econimica.blogspot.com/2015/04/exactly-what-did-nixon-say-about-dollar.html

PhilofOz's picture

Debt owed to whom.....the Rothschild clan?

iofera's picture
iofera (not verified) PhilofOz Apr 22, 2015 6:49 PM

Another anti-Semite exposed.

Deathrips's picture

Hey Debt Slave (IOFERA)...Your buttholes leaking.

 

Go spin your fairy web somwhere else.

 

RIPS

forexskin's picture

the reach of hasbara's law extended courtesy of IOFERA.

Consuelo's picture

Another non-effective (and growing more non-effective-r by the day), 'anti-semite' canard tossing accusation.

Like an overused antibiotic, iofera, your precious term has lost its effectiveness.    Slimeball 'Marvins' are the ones being exposed now. 

roddy6667's picture

You say "anti-semite" like it's a bad thing. Being against evil is a virtue.

PhilofOz's picture

My best mate is Maltese, a semite I understand. The Rothschild pack of thieves are semites?! I guess they must pay you well to do a complete sell out from humanity.  You're a fucking idiot!

Kirk2NCC1701's picture

That's just General Relativity.  As Debt picks up speed  (VoM) that nears "c" (speed of light), it increases in Mass.

Seriously though... I would not bet on China beating the Jewish bankers at their own game. NFW!

They can only beat them by playing a different game, i.e. their own Game and if it's a good game.

forexskin's picture

can you provide any evidence (beyond superficial) that the chinese bankers are playing in opposition to the NWO? the AIIB is being welcomed warmly by the IMF - they will play from the same songbook as long as there is middle class wealth to be asset stripped. main difference in china right now is they are growing a middle class that is not ready to harvest, but harvest they will, in good time.

these psychopathic banksters still have much to gain by cooperating, and that will not end until they turn on each other, once the rest of the world is a grey, bloodless corpse.

EZYJET PILOT's picture

So this is basically the US subprime debacle on steroids, so we'll have to endure this crap, followed by Chinese QE after it collapses. When China becomes USA MK 2 we'll be in the midst of the new world order endgame.

Never One Roach's picture

All I know is there's a flood moving over here from China and buying the houses with cash. They walk into the builders/sellers office take a quick look at the place and ask how much and prepare to write check. I guess these are some of the [lucky few] recipients of China's massive [4x bigger then USA] QE.  They usually have a kid and move here because the school is highly rated.

 

However, this foreign stuff sure does distort the market for locals who can barely afford to eat esp those on a fixed [zero COLA] existence. I wonder how long this will last and if their flow of $$$ into other economies will ever stop.

 

Clinton led the way with his NAFTA and other tade/globalization moves. These are some effects.

lakecity55's picture

It would be interesting to compare Slick's DNA to the Rockefeller family's...

Flying Aardvark's picture

But, but the AIIB ...

kaiserhoff's picture

forty thieves?

Oh wait, there are more bankers than that.  The other Alibaba.

edotabin's picture

Yes, the AIIB is now the best bank in the world and it has loaned money to Putin who has completely isolated the US by sending new torpedoes to Iran. This was done to facilitate the nuclear deal negotiatations which are now being moderated by ISIS because the negotiators were hit with EMPB (B=Brain) which has further complicated the "intense" negotiations.

Russia almost went on nuclear alert because of the US Navy presence in Yemen but recalled the alert at the last moment because all sailors were stricken with Greek baklava syndrome and could not operate the equipment which automatically activates the Nuclear alert equipment! It is suspected this syndrome is the latest weapon in the arsenal of Greek politicians and is being investigated vigorously as it may be a part of game theory.

Come on people! You live under a rock?  Get with the program folks!

NihilistZero's picture

As long as China or anyone else with outstanding debt has a military sufficient enough to repel foreign invasion and suppress dissent (with the aid of a brainwashed populace) at home, debt is but numbers in a computer.  I'm sure just as the shit hits the fan China will go about some marginal liberalizations that will pacify the internal forces that could threaten the party.  Sure trade is affected but it's not a zero sum game.  Considering China has a strong foothold in Africa I think they won't hurt for resources.

Not in support of Red China or any of our other fascist state actors.  But this whole fascination with debt that EVERYONE knows is never going to be re-payed by countries that have the military power to say "no" is beyond me...

Jumbotron's picture

"Let me introduce you to the computer file holding those debts, and the edit button."

No....let me introduce you to Mr. Yellen.  He will show you CNTRL-ALT-P

"Get to work, Mr Yellen"   Chucky Schumer

jmc8888's picture

Well at least they only have about 1.4 trillion in derivatives.  As ZH has shown with Deutsche Bank having more derivatives then the entire GDP of Germany in contrast, China between all of it's banks only have about 1.4 trillion. 

China only has about ~0.33 percent of world derivatives.

Because of this, they can deal with defaults and companies that go under without massive contagion (which we here in the West forget to point out is really derivative contagion), unless of course those defaults trigger a WESTERN firm failure who also happens to be a counterparty to WESTERN derivatives.

So if we want to see this as bad, we should not forget that we in the 'west' are far, far, far, far worse.

Glass-Steagall

 

 

gwar5's picture

As China gets backed up against a wall they will be less effective standing up to western banksters so I hate to read news like this.  China still has gold and reserve assets. They can alway take it all to London and rehypothecate it X1500 and still do well in the clinch.

 

 

kchrisc's picture

China's three biggest assets:

1) Manufacturing/industrial base and the technology to go with it.
2) Hard assets like gold.
3) No Zionist control and plunder.

Liberty is a demand. Tyranny is submission.

 

While not concurring with Armstrong on other things, this is a good article on how the banksters plundered eastern Europe after the fall of communism. The eastern Europeans went from debt free to debt slaves in a short time.
http://armstrongeconomics.com/2015/04/21/how-banks-wiped-out-eastern-eur...

angel_of_joy's picture

China can default on any debt it chooses to, and can close failed banks and create new ones out of thin air. It can also execute corrupt officials in numbers, if the situation requires it. Over there, their commie party is in charge of their central bank, and it can do whatever the heck it wants when it comes to money, economy, industry, immigration, taxation, military, and so on. Heck, they can even build new islands in the middle of the ocean and call them home ! Compare that with US...

Yen Cross's picture

  If this figure hits anywhere near 50, the emerging market shorts are going to get toasted. ;-) lol

  18:45       CNY         HSBC Manufacturing PMI (Apr)             49.6     49.6 (GMT-8)

kchrisc's picture

With a huge manufacturing base, hard assets and friends around the world, things are going to one day be bad in China.

What of the DC US that has none of those things, is the pariah of the world, and dominated and controlled from afar by and for Zion?

Liberty is a demand. Tyranny is submission.

 

Their problem is there, our problem is here.

Yen Cross's picture

 Common sense fails to dictate the day, when you're paid to spend "OPM".

 If that HSBC number comes in hot after the RRR adjustment, the $usd is going to get sold. It's overbought on the 5 hour chart again.

 Paging Mario Draghi?

Al Tinfoil's picture

What this means is that China’s massive debt burden is about to get massiv-er, as banks use ABS issuance as a pressure valve to free up lending capacity. 

So, is China about to emulate Wall Street and sell "HIgh-Rated, Risk-Free Asset-Backed Securities" to yield-starved investors around the World?  Huge amounts of money out there seeking anything that promises decent yield.  China could clean up.  And if the ABSs turn out to be BS?  Would China bother to bail out the issuers, or just pocket the investors' money and yawn (Yuan?).  (Yeah, I know, bad pun).

Any bets on whether the ABSs will be backed by CDSs?  Issued by Wall Street?  

 

 


forexskin's picture

i'll bite.

chinese ABS with CDS insurance issued in what? yuan? what institution in china has the means or mechanism to do this? if wall st gets involved, and takes a cut, are they the underwriters in yuan? if that goes tits up, who bails them out? is china's recent overture to inclusion in the SDR basket a tactical approach to having the IMF backstop the introduction of chinese financialization?

who in the hell would want chinese ABS anyway, given their track record on transparency, and the gross inability to hedge that crap...

i'm betting that most of the vaunted 7% growth is lies, like the ghost cities, bridges to nowhere, industrial capacity, and now mom and pop day trading. bring this cockroach into the daylight, and its revealed to be a continuation of the old communist tradition of reporting the numbers demanded by the latest 5 year plan, or lose your head. this talk about cleaning up chinese debt is window dressing to keep attention off the fact that china is one monstrous bubble of partially productive mal-investment - the inevitable result of central planning. not much different from the ZIOFED experience in the US.

china is about to lever to the moon with no net. what could go wrong...

HolyfieldsOtherEar's picture

So let's see....

Banks will start selling securitized debt to free up room for more lending. And when they do, they'll find that Shanghai brokerage firms can't get enough of the stuff. Maybe the Hang Seng, too. It's a new stock market bubble, er, boom! Regional Chinese banks will furiously push more money out the door so they can sell MOAR collateralized loans! Sliced and diced a thousand different ways!

Ooh! I'll get the popcorn.

Chuck Knoblauch's picture

China owes itself, no one else.

Who does China owe all this money to fools?

They haven't borrowed a dime from any other nation.

kaiserhoff's picture

Good point, and frequently made.  Here's the rub.

When bills can't be paid, some enterprises have to shut down.  In a Maoist, crony economy, that won't be the most productive, because no one even knows who the are.  Those with the clout will do fine, until next time, but the spiral will not stop.

Chuck Knoblauch's picture

The rub is China is a communist society.

They execute 10,000 prisoners every year.

The Chinese execute their debtors.

Why do old debts, never to be repaid, stay open?

Who benefits from that?

China assigns dead man loans to released prisoners.

Great system they have.

Perpetual debt slavery.

Rockerfeller loves this system of banking.