The Cost Of China's "Neutron Bomb" Exploding: $7.7 Trillion And Higher
On Friday we presented Kyle Bass' latest interview in which the Texas hedge fund manager explained the reasoning why he thought shorting the Yuan is the "greatest investment opportunity right now." The crux behind the argument was well-known to Zero Hedge readers, namely China's peaking credit cycle driven by soaring bad, or non-performing, loans which have so far been swept away, but which courtesy of a $35 trillion financial system are nothing short of a "neutron bomb", as we first dubbed the embedded risk, waiting to go off. Here is Bass:
What I think the narrative will swing to by the end of this year if not sooner, is the real issue in China is not simply that profits have peaked. The real issue is the size of their banking system. Do you remember the reason the European countries ended up falling like dominoes during the European crisis was their banking systems became many multiples of their GDP and therefore many, many multiples of their central government revenue. In China, in dollar terms their banking system is almost $35 trillion against a GDP of $10 and their banking system has grown 400% in 8 years with non-performing loans being nonexistent. So what we are going to see next is a credit cycle, and in a credit cycle you see some losses, but if China's banking system loses 10%, you are going to see them lose $3.5 trillion.
Today, months after we first covered the breadth of this most disturbing for Chinese bulls topic, the FT caught up with this critical, for China's financial system, issue and reports that "the downturn in China’s fortunes — particularly across its heartland heavy industry — is already hitting the banks. Annual non-performing loan rates have been doubling annually since 2012. China Merchants Bank, China Everbright and ICBC are seen as among the most troubled."
That's based on official data, which is grotesquely low and completely fabricated. The true NPLs data is well-hidden by everyone from the lowliest bank teller to the Politburo in Beijing, who all know that merely the recognition of the problem would be sufficient to spark if not a full-blown panic then certainly accelerate capital outflows form the nation to an unstoppable degree, especially if the latest estimate which we presented last November from Fitch's Charlene Chu, of 21% in non-performing loans, is accurate.
Back to the FT which notes that "China bulls point to the still low level of NPLs — barely 1 per cent at the big lenders, and 1.8 per cent at mid-tier banks this year, according to analyst forecasts. As a gauge, NPLs in Greece have risen to between 30 and 40 per cent amid that country’s crisis" but then adds that "China experts at independent research house Autonomous suggest investors are underestimating a spiralling problem. Across the board, loan losses will rise by $845bn this year, Autonomous predicts. That, they think, will be enough to shrink profits by 6 per cent at big banks."
Actually if Fitch is right, the problem is in the trillions, but let's assume a more modest figure. Here is what the FT says next:
Some policymakers are privately worried about yet another underestimated issue — whether loan losses, when they materialise, will be recoverable. In western banking markets, so-called loss given default rates can typically range between 30 and 70 per cent. In China, where property accounts for the bulk of collateral used to back loans, LGDs may be far higher. Even if inflated property values do not collapse, collateral values may prove far too optimistic. In China’s nascent property ownership culture, the land on which developments are built is typically state-owned, limiting recovery values.
Considering that one of the biggest scandals in China in 2014 was the realization (as many had warned previously) that millions of tons of commodities were rehypothecated countless times, and thus "pledged" as collateral to numerous counterparties, and that as a result these same counterparties were unable to make sense of who owns what at one of China's largest ports, Qingdao, it is probably quite safe to assume that LGDs in China are if not 100% (or more, which is impossible in theoretical terms but in practice is quite possibe, as another curious side effect of unlimited collateral rehypothecation), then as close to it as possible.
So putting all that together, and using a conservative estimate for NPLs, orders of magnitude below the 21% proposed by Fitch, what is the FT's estimate of China's "conservative case" neutron bomb going off in financial terms? Just about $7.7 trillion.
Investors in China’s banks may well recognise that the lenders cannot be compared with institutions that operate along western lines and will expect hazier disclosures and readier state interference. They are also likely to think that China will not allow its banks to fail. But if analysts, like those at Autonomous are to be believed, China’s banks could require up to $7.7tn of new capital and funding over the next three years. State bailouts could send the government debt to GDP ratio spiralling from 22 per cent to 122 per cent. That kind of shock would be a challenge for any country, even one of China’s vast might.
Again, this is the conservative NPL case. Now assume 21% NPLs.
(8 votes)
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"They're a perfect fit! Let them into the club!" - Lord Rothschild
"They're a perfect fit! Let them into the club!" - Lord Rothschild
China’s banks could require up to $7.7tn of new capital
What the fuck do they mean by "capital"? Global central banks are fucking printing it, it's not capital.
My little China girl
You shouldn't mess with me
I'll ruin everything you are
You know
I'll give you television
I'll give you eyes of blue
I'll give you a man who wants to rule the world
-David Bowie & Iggy Pop
RIP David
He was bisexual. Or was it try-sexual? Wicked!
"There us no rest for the wicked". Read that somewhere.
Ain't no rest for the wicked - probably Cage the Elephant
Never did understand why what someone wants to do with their genitals (assuming mutual consent) was so important.
Between the ears is, IMHO, much more important.
"He's a tri-sexual. He'll try anything, mud, chickens, whatever."
~ Cheech Marin
Wicked is taking a dump on dead people.
There is much discontent bubbling in the social underbelly of communist china and once the fabric is torn by the debt bomb detonating they will have their hands full unless they play their part in the globalist war games and can whip their freedom loving testosterone filled boys up into a anti western frenzy they are fucked 9 ways to sunday. (not that we aren't) Personally I hope the next student revolts ends up tossing their corrupt fat assed party leaders into the Yangzi about the same time we toss ours into the Potomac.
Gegory Mannirino UPDATE - Technical breakdown breakdown S&P 500 reached. Talks about how much money he lost.
https://www.youtube.com/watch?v=zzaLnRxVCEY
seems like China's gone from the Han dynasty to the Scam dynasty....
7.7 Trill will buy an awful lot of melamine
USSA's debt to GDP ratio is 280%. Nothing to see here, next. Alos, China tells banks to stop ordering US dollars - https://www.youtube.com/watch?v=PGE8wKRM6Us
Exactly. You can say it's mostly in the hands of "private" companies in China or you can say it's mostly in the hands of the government in the US, but the debt is still there. Just which bucket you count it in.
The U.S. has its own ticking bomb: http://www.usdebtclock.org/
And we've sold out our manufacturing to China; are we going to pay it back with pop?
pay it back... lol
If not with pop, then with Pop Music.
Talk about... pop music.
Soon enough well over $19 trillion.
Everything is outsourced, what techology jobs imported H1Bs and L1s visa holders take.
7.7 trill? Meh..chump change..
And "funny money" created out of thin air at that. No need for concern.
Absolutely, take me all of 7 seconds to type out that much money. BFD, throw out 600 quadrillion and I am still not impressed.
Contained
... to the universe.
"To infinity and beyond!"
Money ain't worth the paper it's printed on.
True dat, but the paper ones are still a bit more comfort than those other ones in the data banks. These might become worthless and become asswipe, but air money is total farce
China is panicked. they know that this collapse could really spiral out of control. Hard to believe that they allowed their banking system to get into such a mess. But then again, we are Americans. so what right do we have ... to say anything???
I wonder if they are sorry the laughed in Geithner's face? Not that the little prick, and US Treasury Secretary & debtor-in-chief didn't deserve it but, hey, they're not looking too swift right now either.
And they thought it would be a good idea to imprison anyone selling? Really.. wow what a bunch of geniuses, No one that boneheaded should have anything to do with a stock market no matter what they want to call it or think it is.
Concentrating on the artificial lines on maps called countries completely misses the point.
Psychopathy does not respect them.
The pattern is not hard to discern.
There are predators and there's prey.
There are a few who are neither.
I'd like to think I'm in the latter group - at least that's what I strive to be.
You say that some are neither predator nor prey.
So what does that make them? Vegetables?
Hey, and speaking of vegetables, you know what the hardest thing is about fucking a vegetable?
Getting them strapped back into the wheelchair.
save for later research
You wAnt eggroll with that?
Off to Basel, Switzerland BIS they will get this straightened out.. LOL funny PNAC Bass is the crony book that can stop the eight elders from losing there head (literally).. the Horror the terrorist my goodness where would Sheldon's Macau loot come from????
If China were out to 'clean the West's clock', their plan might not look any different than what we are seeing out of the PBoC today.
We all acknowledge that the Fed lies its tits off to the American public about how awesome the American economy, but no one wants to believe that PBoC would lie to the economic community that things are almost out of control in China.
Especially if that lie is sine qua non to cleaning the West's clock.
I think if China makes the hard decisions and decides to clear out all its bad debt and zombie banks they will be back as an unstoppable force.