China's Cost To Avoid The Dreaded Working Class Revolution: A Record CNY11.1 Trillion, And Rising

Tyler Durden's picture

Ever since 2010 we have explained that one of the biggest risks facing the world is China's gargantuan mountain of debt, seen in its consolidated state in the following McKinsey chart...

... a mountain which has doubled from its 2007 levels of 158% of GDP and which as of Q4 2015 is well over 300%, as China races to catch up with world-record holder Japan and its 400%+ total debt/GDP.

As we have also explained repeatedly, the problem with China's debt load is that while it was China's historic leveraging spree in the years of the great financial crisis, the world's most populous nation, where debt has been rising exponentially, appears to be approaching its debt capacity load, and as such when the developed (and emerging) world slides into its next recession, there will be no "growth dynamo" which can add trillions in new debt to kick start world growth once more.

 

Another problem with China's financial system is that in mid/late 2014, Beijing decided to implement a purge of the country's shadow banking system, where "anything used to go", and which while long overdue resulted in the shuttering of one of the country's most permissive lending channels and led to a dramatic slowdown in the non-loan growth of China's Total Social Financing, its broadest consolidated monthly credit creation tracker. The immediate result was the global growth swoon from the winter of 2014 which was incorrectly blamed on "harsh weather."

 

Yet another problem is that as commodity prices tumbles, as global trade slowed down, Chinese loan issuers have seen a massive surge in bad loans, if not officially, then certainly as tracked by unofficial sources. As we reported a month ago, China's true NPL may be as high as 20%, a number suggesting up to $3 trillion in loans have gone bad and have to be written off. Even a far more conservative estimate by CLSA quantified China's bad loans at 8.1%, five times greater than the official number and a key reason for China's relentless deposit flight as local savers gradually realize a broad financial sector crisis is not only inevitable but just a matter of time.

As debt loads rose and as interest expense built up, China's companies were forced to keep generating ever more cash flow to satisfy creditors' demands. However, as we also showed three months ago, as of this moment over half of China's commodity firms are unable to even make one cash coupon payment.

Of course, in any normal society, this would be where dozens of management teams, seeing an insurmountable debt load, simply threw in the towel and filed for bankruptcy handing over the equity keys to the creditors. However, in China, where conventional Chapter 7/11 process is non-existent (the country only had its first ever corporate default recently) this is not an option as a wave of bankruptcies would be inevitably accompanied by the one thing Beijing dreads most: mass layoffs, and social unrest.

As a reminder, over a month ago we showed "The Biggest, And Most Underreported, Risk Facing China", namely rising worker anger, manifested by a record surge in labor strikes, .

 

The real-time tracker we presented was quickly used by both the NYT and the WSJ to pen comparable articles of their own.

 

Beijing is quite aware of this confluence of financial and social instability and is desperate to if not halt it then delay it as much as possible.

This delay, however, has a cost and as Caixin writes, the country's banks - all of which are directly or indirectly state-owned - extended 11.1 trillion yuan in new loans in the first 11 months of the year, breaking last year's record for lending in one year even before December's figure is added. The second highest amount for one year was 9.78 trillion yuan in 2014.

Who needs QE when China's banks are directly injecting trillions (nearly $2 trillion just in 2015) into the banking system.

Why the need for this epic debt injection? As Caixin explains, the borrowing this year was driven by troubled companies that stayed afloat only because banks gave them new loans to pay off old debts and by home mortgages and transport infrastructure, a source close to the People's Bank of China said.

Recall the definition of the "Minsky Moment" in ponzi finance - "the moment at which a credit boom driven by speculative and Ponzi borrowers begins to unwind. It is the point at which Ponzi and speculative borrowers are no longer able to roll over their debts or borrow additional capital to make interest payments." 

 

As we showed a month ago, China is already at the tipping point as more and more companies have to borrow new debt just to pay interest:

According to Caixin, even in China it is becoming increasingly clear just where on the "Minsky" curve the country is to be found as several bankers said they noticed an increase in cases of companies relying on new bank loans to repay old debt. This was particularly clear in industries such as shipping, coal mining and steel manufacturing, which the government has said must be streamlined to reduce excess capacity.

One banker said these firms were often the ones known to have relied on shadowy private lending for survival in the past. As many private lending networks unraveled amid tighter regulatory scrutiny and an economic downturn, many firms are turning turned to banks for new loans to keep them afloat, he said.

"These companies are doomed," a risk-management executive at one bank said adding that forcing banks to lend to them "amounts to dragging down the quality of the loans to non-performing."

This is also known as the "Ponzi Finance" moment which takes place just before the "Minsky Moment" unwind, and is better known as "throwing good money after bad."

So why do banks keep throwing good money after bad? Here is the punchline: "Banks were sometimes strong-armed by local government officials to extend loans to these companies because they feared letting them go under would cause social instability, a risk-management executive at one bank said."

And there you have it: either keep injecting trillions in new loans, most of which will never get repaid, and whose accumulation will make the endgame that much more severe, or risk social and civil meltdown as China's miracle 30 year credit bubble bursts.

China's banks are pushing back, and are more inclined to make loans to home buyers than to small and medium-sized enterprises, an executive of a state-controlled bank's branch in the southern province of Guangdong said. However, under duress from Beijing they have little choice. 

The Industrial and Commercial Bank of China, the country's largest bank, has changed its policy this year to permit more loans to projects such as new airports.

The bank's former president, Yang Kaisheng, said last week at a forum that he is worried banks may be repeating a mistake of lending too much with too little information. "History has shown repeatedly that whenever banks lend too much, bad loans will inevitably increase significantly," he said.

Unfortunately, it is far too late: banks had already lent over 1 trillion yuan more this year than in 2009, a year of heavy lending related to government efforts to soften the blow that the financial crisis has on China.

And, as explained previously, once companies begin taking on debt just to pay interest, it's game over, and just a matter of time before pictures such as these shown here first a year ago in a post demonstrating how Chinese riot police train for a "working class insurrection", are no longer just a drill.

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Glass Seagull's picture

 

 

"This is just a drill!  I repeat, the murder you're seeing isn't real, it's all just a drill!  Now go back to your computers and buy stuff off of Alibaba to show supreme confidence in the Communist regime!"

MarketAnarchist's picture

The us is not the cleanest dirty shirt.  It is the 'slowest sinking ship'...  the CPS china will sink first.

DownWithYogaPants's picture

I'm wearing the my cleanest dirty underwhere?  On the slowest sinking shit.

NoDebt's picture

So let me get this straight.  You're saying YET ANOTHER Communist, centralized command-and-control economy has somehow run itself up on the rocks?  Shocking.

Many of you might be too young to remember, but in the 1980s it was a foregone conclusion that Japan was going to take over the world (financially speaking).  They bought everything on the globe.  Their markets soared to new high after new high.  Their perfect systems of just-in-time delivery and super efficent workforces with lifetime employment were just too much for the rest of the world to keep up with.

You think I'm pulling your leg but I'm not.  A lot of people were shitting bricks over their meteoric rise and stunning economic progress.  Japan might not be Communist, but it still exhibited a lot of the same core principles (there's a reason they called it 'Japan, Inc.' back then).

Today's situation with China feels a LOT like that.  A LOT.

Four chan's picture

MUST-KEEP-THE-SLAVE'S-HANDS-MOVING.

SWRichmond's picture

chinas-cost-prevent-working-class-insurrection-cny111-trillion-and-rising

Shit, the Pentagon has lost $2.3 Trillion "unaccounted for", plus we have spent more than $2 Trillion more killing people in the last 10 years.  China's a bunch of pikers!

Papi_Al-Mahdi's picture

They could save a lot of money copying what is done here in the US with Fluoride, Statin drugs, and Chemtrails.

NidStyles's picture

"They aren't communists anymore goy.... "

847328_3527's picture
American workers are much more reliable: Ford recalls 313,000 vehicles for dangerous electrical problem

 

http://www.msn.com/en-us/money/companies/ford-recalls-313000-vehicles-fo...

 

 

Antifaschistische's picture

agree ND, but can I just say this...wouldn't it be nice, if we lived a country where our government actually had some level of fear of revolution from the masses?   

but no...our demasculinized, over feminimized, over drugged, playstation addicted, lazy bunch of adult boys will never muster up the courage or put down their i-thingy long enough to revolt.

sad.

centerline's picture

Post-WWII Japan was required reading in one of my engineering classes that leaned more on the industrial side.  Your spot on as usual NoDebt.  Although China has done Japan, ghetto style.

tmosley's picture

Wrack up a bunch of debt while aquiring gold, then wreck the dollar system and tell your debtors they will be paid off in vastly devalued dollars, not in their new gold backed currency.

Charles Wilson's picture

Looks like the Plexiglass Shield Industry is Bullish for China...

nmewn's picture

Ever buddy up in heah got Oba-Mao fowns! 

MrNosey's picture

We are told to believe that the enemy is now our ally and vice verse, everything has been turned upside down by the dangerous psycho's in power.

Governments are losing control of their population and China in particular have the numbers to overthrow theirs with ease, so they are becoming increasingly fearful of this outcome!

False flag incidents are no longer having the desired effect, so expect more and more draconian measures to be taken in a vain attempt to keep control.

http://beforeitsnews.com/conspiracy-theories/2015/12/false-flag-attacks-...

 

---------'s picture

be careful   aliens are running the government and they noticed you

you should take a bath in olive oil to wash of the marker theyve put on you

pods's picture

I'm gonna try that one on Mrs. pods.

Thanks!

Stroke's picture

Send Obama for some "Hope and Change"

OregonGrown's picture
USA's cost to delay a working class revolution: 19 Trillion and rising

Who revolts first?

 

MarketTruth's picture

EXACTLY! How much has the USA spent on 'bread and circus'?

BandGap's picture

It is not necessarily the amount, it is the rate at which the spend is increasing. China has a serious, if not fatal, issue to deal with.

backwaterdogs's picture

it wont be the u.s.  At least the Chinese have enoough balls to show up with sticks.   Americans have guns and can't be bothered to get off their lazy asses and do something about this god dammned farse.

BandGap's picture

The average Chinese spends 50% of their income on food. The US placates the masses with food stamps.

Not lazy, just well-fed.

DaveyJones's picture

who cares about the economy Kim Kardashian had a drunk husband

Normalcy Bias's picture

I wonder what they've spent towards fomenting a revolution in China?

More Ammo's picture

If my calcs are right that is only about 1.7 Trillion Dollars vs whatever double digit Trillions you want to settle on in the USSA.

 

What's the big whoop?

KnuckleDragger-X's picture

The thing the Chinese government fears is a popular uprising since that's how they came into power in the first place and why half their military is internal security troops. The thing is, those regional security forces have a long history of warlordism. This should be a true spectacle.....

buzzsaw99's picture

don't worry about the chinese billionaires. they got theirs.

firstdivision's picture

Go figure, the people stealing US jobs are the first to get off their asses and revolt. 

stant's picture

War is coming , Economic collapse ,ww3 ,civil wars .and all at the same time

youngman's picture

China will do Japan squared....many of the ruling class are the owners of that debt..so they will never lose their o money....expect 20 years of flatline for China now too...

centerline's picture

Is all about unleashing nations populations against their governments. Not just in China, or Russia, or the EU. It is here in the US too. It all goes to shit, but the last nation standing has the upper hand. Musical chairs.

kaboomnomic's picture

3 triilon dollar? Let see.. latest FDIC report, how much leverages that those US 5 top banks is?? At least 70x!!

So with a real assets value of 1.5 TRILLIONS DOLLAR/BANK (averaged between 5 banks). How many liabilities that those totals 5 banks would be??

And i don't see that mentions everywhere here.

As of China. Like always. The govt companies/banks? Would always be bailout. For privates? You're on your own. If you follows China news for years (as the authors claims to be)? You'll already knows this facts.

Still don't get it do you (while you claiming expert on the subject)??

847328_3527's picture

At least China has the "One Child Policy." I wish America had at least the, "One Daddy Policy."

More Ammo's picture

an update to your knowledge base

China Ends One-Child Policy, Allowing Families Two Children

I hate nyt but a ref link anyway

http://www.nytimes.com/2015/10/30/world/asia/china-end-one-child-policy....

847328_3527's picture

It's America's lack of the "One Daddy Policy" that worries me. The tax rebates/incentives to shit kids out like crazy doesn't enthuse me either.

Iocosus's picture

The Chinese government is just buying time before they unroll the "Social Credit Scoring System' c/o Alibaba, where each citizens' every action on social media will be scrutinized and then assigned a score on the good/bad citizen spectrum.

http://theantimedia.org/china-just-launched-the-most-frightening-game-ev...

Bull Bear Nice Pair's picture

The Chinese have little personal debts. The income of Chinese workers has been raising rapidly. With US$ 21 trillion domestic deposits and 90% home ownership, most Chinese are stake-holders who will hate to see their hard-earned fortune destroyed in a revolution. The probability of uncontrolled unrest in China is greatly exaggerated.

roddy6667's picture

America will have a revolution in the streets long before China. Almost everybody is doing better than 10 or 20 years ago. There is little to complain about.

FreeShitter's picture

As long as fuckbook, kim k's newest ass shot, the nfl, and ebt are functioning the beatings will continue on. No revolution until the sheep become totally fucking broke and starving

yellowsub's picture

You mean today's American that are mainly internet activists, where the only political action they take is conveniently through a computer or phone?

No, you think too highly of the rest.  The only revolution they think is voting for Bernie Sanders.

WillyGroper's picture

They leave half of their population by the roadside.

Demographic/Eco nightmare.

The Chinese have adopted western behavior, money, money, money, me, me, me.

Who will take care of China's elderly people? - BBC News

 

roddy6667's picture

In China, almost everybody is much better off than they were 10 years ago. The poor have come the farthest. The middle class, which makes up over 50% of the population, is growing fast. Of course, the rich are doing well, also. There are very few malcontents. An article like this is propaganda. Who is presenting it and what are their objectives? Probably the same people who organized the big "strike" and demonstrations in Hong Kong in the past year. BTW, their leaders were videotaped going in and out of the American Embassy alsonst daily. America has its dirty fingerprints all over this.

Of course, all the Americans who live in a country where the middle class is shrinking will fall all over an article like this. Everybody wants to believe that somebody is worse off than them.

These photographs seem to be from the student demonstrations in Hong Kong last summer.

Don't forget that Hong Kong is voted every year to be one of the places in the world with the most freedom to conduct business and live your life in the world.

BandGap's picture

Hong Kong is not mainstream China.

DaveyJones's picture

"In China, almost everybody is much better off than they were 10 years ago" .......lungs aside

BandGap's picture

"These photographs seem to be from the student demonstrations in Hong Kong last summer."

Students wearing hard hats is the current fashion rage.

roddy6667's picture

The demonstrators in Hong Kong wore hard hats.

css1971's picture

The photos are from police riot training courses.

Tarjan's picture

I live in Sichuan Province and have traveled around China a fair bit.

Roddy's observations agree with what I am seeing.

~ Tarjan