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Don't Forget China's "Other" Spinning Plate: Trillions In Hidden Bad Debt
To be sure, there’s every reason to devote nearly incessant media coverage to China’s bursting stock market bubble and currency devaluation.
The collapse of the margin fueled equity mania is truly a sight to behold and it’s made all the more entertaining (and tragic) by the fact that it represents the inevitable consequence of allowing millions of poorly educated Chinese to deploy massive amounts of leverage on the way to driving a world-beating rally that, at its height, saw day traders doing things like bidding a recently-public umbrella manufacturer up 2,700%.
The entertainment value has been heightened by what at this point has to be some kind of inside baseball competition among media outlets to capture the most hilarious picture of befuddled Chinese traders with their hands on their faces and/or heads with a board full of crashing stock prices visible in the background. Meanwhile, the world has recoiled in horror at China’s crackdown on the media and anyone accused of “maliciously” attempting to exacerbate the sell-off by engaging in what Beijing claims are all manner of “subversive” activities such as using the “wrong” words to describe the debacle and, well, selling stocks. Finally, China’s plunge protection has been widely criticized for, as we put it, “straying outside the bounds of manipulated market decorum.”
And then there’s the yuan devaluation that, as recent commentary out of the G20 makes abundantly clear, is another example of a situation where China will inexplicably be held to a higher standard than everyone else. That is, when China moves to support its export-driven economy it’s “competitive devaluation”, but when the ECB prints €1.1 trillion, it’s “stimulus.”
Given the global implications of what’s going on in China’s stock market and the fact that the devaluation is set to accelerate the great EM FX reserve unwind while simultaneously driving a stake through the heart of beleaguered emerging economies from LatAm to AsiaPac on the way to triggering a repeat of the Asian Financial Crisis complete with the implementation of pro-cyclical policy maneuvers from a raft of hamstrung central banks, it’s wholly understandable that everyone should focus on equities and FX. That said, understanding the scope of the risk posed by China’s many spinning plates means not forgetting about the other problems Beijing faces, not the least of which is a massive collection of debt that, thanks to the complexity of local government financing and the (related) fact that as much as 40% of credit risk is carried off balance sheet via an eye-watering array of maturity mismatched wealth management products, is nearly impossible to quantify or even to get a grip on.
Over the years, we’ve endeavored to detail China’s massive (and largely hidden) debt problem by drilling down into i) the local government debt saga (see here for the latest), ii) China’s management of NPLs (see here for instance), and iii) the lurking wealth management product problem (see here to read more than you ever cared to on this issue).
With all of the above in mind, we present the following from RBS’ Alberto Gallo who has made a valiant effort at summarizing contagion risk in China’s labyrinthine banking system.
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From RBS
The investment-driven model and fiscal stimulus have helped China achieve fast growth, but also led to rapid debt built-up. Unlike the US and Europe, which have deleveraged since the crisis, debt overhangs have kept growing in China. In common with previous examples of rapid credit growth, China now also has to tackle the collateral effects like overcapacity in industrial sectors, deteriorating asset quality and loss of growth momentum.
Local governments have also become dangerously levered. Under the fiscal rules introduced in 1994, local governments in China in theory were not allowed to raise debt. Faced with revenue expenditure imbalances, they often had to circumvent the rules by creating separate entities (local government financing vehicles) to borrow, largely through shadow banking channels. An official audit released in 2014 showed that total local debt had reached RMB17.9tn ($3tn) by the middle of 2013, equivalent to 38% of GDP. This figure includes debt local governments are directly responsible for (RMB10.8tn) plus guarantees. The government has started to reform the system by allowing direct bond issuance by local governments since last year, introducing more transparency and reducing their borrowing costs. However, more radical fiscal reforms (for example, an overhaul of the payment transfer system or greater taxation power for local governments) are difficult given the complex layers of government. In China, there are five levels of governments, compared to three in most other countries. This makes it logistically difficult to closely match tax collection and spending, and sometimes can encourage regional protectionism.
Banks have been the major intermediary for lending over the past years, leaving them vulnerable to rising credit risks. As shown below, most of Chinese corporates’ credit needs are still met by bank loans rather than bonds. Loans from China’s top four banks have more than doubled over the past seven years to reach 26% of GDP by H1 2015 (Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China).
Cracks are starting to appear: NPLs still look low, but are rising rapidly. According to the banks’ H1 2015 results, NPL ratios are still low at around 1.4-1.8%. However, the nominal rises in NPL amount have been significant, leading to flat profit growth for all four banks. Moreover, it has been a common practice in China for banks to roll over loans to strategic corporates when directed by the government. Such loans, though doubtful, will not be recognised as NPLs.
The government’s ability to support banks has declined. Traditionally the Chinese government has always stepped in to help banks when needed. For example, it issued special bonds to recapitalise the big four in 1998. Given the rise in banks’ loan books, the government’s ability to shoulder losses has declined. For example, bank loans increased to 130% of China’s FX reserves by FY 2014, up from 80% in 2006.
In addition, China also faces rising financial risks in the shadow banking sector. As shown above, the share of shadow banking credit has increased rapidly over the past years. As we discussed earlier, default risks remain high in the shadow banking sector. In August, ten trust companies and a fund manager requested a bailout from the top Communist party official in Hebei province (FT), following several default episodes last year.
Conclusion: The Chinese government is aware of the build-up of financial risks in the economy, and is trying to smooth the way of debt restructuring by more monetary easing. However, it is never an easy task to engineer an orderly deleveraging process, especially as the country also faces other structural problems and is in urgent need to transform its economic model and step up financial liberalisation.
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Does this mean the recovery is in jeopardy?
nahhhh.......Fantasy football and Merikan Idol will keep the dopes occupied
Let's not forget that selling at market tops is only for the elites, whether in Communist Capitalist Peoples Republic of China or Communist Capitalist USSA.
Only the top 0.01% are allowed to skim the vast majority of the profits off the top.
Once the market hits rock bottom the Communist Party in both countries gives permission to the peons to sell for pennies on the dollar while the elites once again swoop in to pick up the remnants at bargain basement prices.
All hail the New Great Leap Forward, where the sheep are sheared and the hogs are slaughtered.
Yeah trillions hidden in bad debt, yeah, like the money they have in USA treasuries. LOL.
China can default on any debt it wishes at a moment notice, with minimal consequences. That's because, unlike the US of A, the banksters are not in charge of neither China's government nor its money supply. There is no "too big to fail" in China or, for that matter, "too big to shoot" in public, for economic treason...
Don't do drugs, drugs are bad. M'Kay.
Get lost, mate. Only morons do drugs...
I wish they would stop coming to the house and trying to convert me. And I'll never vote for Romney. Oh, wait. That's Moron, not Mormon. Sorry. I get them confused.
" That's because, unlike the US of A, the banksters are not in charge of neither China's government nor its money supply."
China's monetary system is a debt-backed monstrosity that functions in exactly the same way as the US's monetary system. So is Russia's. The political and business elite of the country that own these banks are just as corrupt and conniving as the United States's bankers and businessmen and have likewise infiltrated into the highest levels of government.
But you're right, the debt-backed rot hasn't really taken hold in China or Russia yet, while the US has become overripe because of it. But in the drive for economic growth at any cost China and Russia are seeing their financial systems hollowed out at an even faster rate than the US's was.
The only way to get rid of bad debt in excess, and allow a return to economic normalcy, is to default on said debt. It used to be pretty common world wide, before politicians became captives of bankster interests. Those countries able to default, will recover and prosper. Those unable, will just die slowly and painfully. If you want proof, check what happened in Iceland and in Greece...
No Jews in China.
I thought they were all Jews. http://www.atimes.com/atimes/Southeast_Asia/JJ02Ae01.html
But nazi kooks are apparently welcome.
And easy to spot once the anti-westerner pogroms again break out over there.
To the modern day Boxers-- you're the Jew.
Bad debt includes all the US treasuries which is probably allot more than the chine have
If it is any consolation, USA is also efffed.
All very true. But China isn't following a communist system, but state-oriented capitalism. Workers have no input whatsoever in the operation of enterprises and are unable to freely trade goods and services. All economic activity is directed by a political and business elite which are really one and the same.
Where do you get this shit? I live in China. Most businesses are private, and can freely trade however they want.
Do you make this stuff up, or is it in the 1956 Cold War propaganda materials your handlers feed you?
yeah,the "Hidden" ALWAYS comes back to bite ya....hidden sins,hidden debt,etc,etc.
Don't forget the $500 Trillion spinning debt plate of the U.S. either.
The U.S. has a 302% Debt to GDP ratio if you open the closets with the skeletons.
Don't forget the US 400% debt to revenue ratio, third in the world behind Greece.
312% US government debt to GDP according to Counterpunch last week: http://www.counterpunch.org/2015/09/02/wall-street-and-the-military-are-...
Do the Chinese have massive hidden derivatives like the West? Uncurious minds ('til now) would like to know.
Hey I never thought of that. BIS said earlier this year that there are $630 trillion in derivatives, are any of these Chinese / how much of these are Chinese??
With the very public collapse of their markets, the devaluation of their currency AND the fact that it's made it to ZH leads me to believe-
-this word hidden; it may not mean what you think it means.
"Unlike the US and Europe, which have deleveraged since the crisis, debt overhangs have kept growing in China."
I'm rather curious about the veracity of the above parse, as there seems to be quite a bit of information out there that at the very least, would put this assumption into question.How dare you question the veracity of the Great ObaMao recovery.
If the US economy had not recovered do you think Dear Leader would be playing golf everyday?
Not only is that statement false, it is actually opposite of what has happened. Always examine the narrative.
So basically, all the city mice in China will be deeply indebted by now and lives in a shambles, and the country mice in China, by way of no or low debt, will be perceived to be more 'credit-worthy', than everyone else in China, so are recruited into the new middle class, via being given a state credit card to go shopping and increase economic attractiveness of rural life once again?
At this point as crazy as that seems (I am kidding) I would not put it past central-planning Beijing to try it.
The people in the country go to the city to live and pay rents in the foreclosed RE, and the people in the city go back to the country to do indentured work to pay off debts. So a combined great leap forward with a great slide backward to the rice paddy.
"Thanks for playing" - Shanghai Casino
What happens if China exposes the books sold by Washington DC to float kicking the can debt?
It will be colossal and damaging to those involved within elite central planning circles.
Who will they blame once the emails surface? National security breaching will be caught within the United States of America government servants.
Discussing debt in terms of good and bad is pointless with ZIRP. ZIRP makes any loan issuable because the banks are focused on maximizing the debt load per issuence. You see if you ain't earning interest it takes moar loans to make up the difference when it comes to return and earnings.
High interest means the higher a standard of loan is; low interest and loans have to be issued at capacity to return an earning..
Exercise for Project Mayhem - If an interest rate is 10% on 100 then the earing per annum is $10. If an interest rate is 1% the return is $1. Therefore a bank must make 10 loans to equal the return of the first example. ANSWER - MOAR BAD LOANS will be issued.
And this is why all banks are fucked - they are all leveraged at capacity. One bad bet and the margin calls will be larger than ever.
The debt, good or bad, is irrelevant, because it is all just "monopoly money" - they can create and destroy as much as they want just with a few computer keystrokes.
The only things that really matter are
1. will global consumers buy what china makes in sufficient quantities to keep the economy from declining
2. how fast and big will the domestic service economy grow.
Everything else is news noise.
The Chinese have a savings rate of 36%. This will counterbalance the small drop the stock market has experienced. In 2007-2009, it dropped several times as far and the wheels did not fall off the country's wagon, despite doomsday bloggers predictions.
Only about 10% of the people are in the market. It's not a BFD..
.....Don't tell the facts it will hurt others.
financial liberalisation
Isn't Lloyd Blankfein a freakenough for chrissakes. Like the world needs another banker.
Learn and listen. form your opinions.
The Alchemy of Finance by George Soros Full Audiobook
https://www.youtube.com/watch?v=TI0V04dP4t8
Not a lot of people where here arround 2007/2008 but for those who did, might remember the capital flight from the west to Azia.
A lot of hot money flew to Azia and crazy investments where made.
Now that money is being pulled back. And well... most of it is gone.
So China doesn't need to blame it's own people. It's Western hedge funds that want their money back.
If any stock should be shorted: BlackRock