A Chinese Banker Explains Why There Is No Way Out

Tyler Durden's picture

Over the past year, we have frequently warned that the biggest financial risk (if not social, which in the form of soaring worker unrest is a far greater threat to Chinese civilization) threatening China, is its runaway non-performing loans, which at anywhere between 10 and 20% of total bank assets, mean that China is one chaotic default away from collapsing into the post "Minsky Moment" singlarity where it can no longer rollover its bad debt, leading to a debt supernova and full financial collapse. And as China's total leverage keeps rising, and according to at least one estimate is now a gargantuan 350% of GDP (incidentally the same as the US), the threat of a rollover "glitch" gets exponentially greater.

To be sure, in recent months the topic of China's bad debt has gained increasingly more prominence among the mainstream, and notably none other than Kyle Bass has made the bursting of China's credit cycle the basis for his short Yuan trade as noted here previously:

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.

And judging by the surge in recent and increasingly louder calls for a Chinese devaluation, some advocating a major one-off currency debasement, Bass' perspective is certainly prevalent among the trading community. Bank of America goes so far as to speculate that the "upcoming G20 meeting in Shanghai offers an opportunity for policy makers to seize the “expectations” initiative via a one-off China devaluation." It does, however, also add that the "risk is markets need to panic first" before instead of piecemeal devaluation, China follows through with a Plaza Accord-type currency intervention.

Friday's adoption of NIRP by Japan, which send the US Dollar soaring, has only made any upcoming future Chinese devaluation even more likely.

But whether China devalued or not, one thing is certain: it is next to impossible for China - under the current socio economic and financial regime - to stop the relentless growth in NPLs, which even by conservative estimates at in the trillion(s), accounting for at least 10% of China's GDP.

Sure enough, a cursory skimming of news from China reveals that even Chinese bankers now "admit the NPL situation is dire, but will keep on lending" anyway.

As the Chiecon blog notes, NPL "ratios might be closer to 10%... supported by revelations in this article, where Chinese bankers complain of missing performance targets, spiraling bad loans, and end of year pay cuts."

“Right now, we’ve nowhere to issue new loans” said Mr. Zhang, a general manager in charge of new loans at one of the listed commercial bank branches. Zhang believes NPL ratios have yet to peak, with SME loans the worst hit area. Ironically this has forced Zhang to direct lending back to the LGFVs, property developers and conglomerates, industries which the Chinese government had previously instructed banks to restrict lending to, based on oversupply and credit risk fears.

But the main reason why China is now trapped, and on one hand is desperate to stabilize its economy and stop growing its levereage at nosebleed levels, while on the other hand it is under pressure to issue more loans while at the same time it is unwilling to write off bad loans, can be found in the following very simple explanation offered by Mr. Zhou, a junior banker at a Chinese commercial bank.

"If I don’t issue more loans, then my salary isn’t enough to repay the mortgage, and car loan. It’s not difficult to issue more loans, but lets say in a years time when the loan is due, if the borrower defaults, then I wont just see a pay cut, I’ll be fired, and still be responsible for loan recovery."

And that, in under 60 words, explains why China finds itself in a no way out situation, and why despite all its recurring posturing, all its promises for reform, all its bluster for deleveraging, China's ruling elite will never be able to achieve an internal devaluation, and why despite its recurring threats to crush, gut and destroy all the evil Yuan shorts, ultimately it will have no choice but to pursue an external devaluation of its economy by way of devaluing its currency presumably some time before its foreign reserves run out (which at a $185 billion a month burn rate may not last for even one year).

However, before it does, it will make sure that it also crushes every Yuan short, doing precisely what the Fed has done with equity shorts in the US over the past 7 years.

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Father Thyme's picture

And the Status-6 ‘KANYON’ strategic nuclear torpedo, now with more Cobalt-60!
www.hisutton.com/Analysis%20-%20Russian%20Status-6%20aka%20KANYON%20nucl...

                                  Got Fallout Shelter?

tarabel's picture

 

 

The one good thing about everyone stealing the American W-88 warhead design (and its successors) is that American weapon design has long been working towards lower yield and lower radioactivity, both initially and as a lingering side effect.

Putting a cobalt jacket on any nuclear warhead aims deliberately at the exact opposite effect. It is a process that deliberately produces the dirtiest and most permanently poisoned environment, in human terms, forever.

Cobalt jacketed warheads = deliberate war crime beyond rational comprehension. If Vladimir Putin is indeed deploying such things, he is the Devil's right hand man. Period. Full stop. End of story.

THE SOLUTION IS DEBT FREE MONEY CREATION's picture

Lol...as if Putin is any more or less of a psychopath than any of the others...I have the feeling that Putin might do me the decency of vaporising me and my family quickly or even have the balls to personally shoot me in the face if I was pissing him off...your Zionist NATO and Israeli buddies have an altogether more insidious and sickening modus operandi...genetic weapons, viruses to stop breeding, MK Ultra, Operation Gladio B, Operation Mockingbird decendents, industrial scale child abuse paedophile blackmail rings all topped off with infinite debt based currency creation on a finite planet...so war and depressions are baked into the cake of this centrally planned nightmare 1984 dystopia...the enemies are funded and fabricated at will to enable this permanent hell on earth so a tiny few "chosen" can enslave the rest. It is repugnant everywhere...so please leave this childish anti Russian propaganda on the card that Unit 8200 or the NSA give you please. Cheers.

NoDebt's picture

China will never rise above the level of cheap-plastic-crap-maker and mediocre copier of other people's technology.  An entire culture built on the premise that failure can never be admitted to because it would affect their social status.  Their NPLs could be running at 80% and they would never admit there is a problem.  They haven't had an original idea as a society for over 1000 years.

 

roddy6667's picture

You have about 5 erroneous assumptions in that post. You must get up pretty early in the morning to be that wrong.
How much time have you spent in China making observations that led to these conclusions? Just what I thought. You get your "information" from the American media that your handlers feed you.
Good citizen. Here's a treat.

COSMOS's picture

The Banker has also been overhead saying 'If I dont steal that schmucks kidneys I die'

DownWithYogaPants's picture

Regarding NoDebt's comment and  Roddy6667's rebutthole:

I have done tech support for Universal Laser's cutting machines with Chinese.  It is completely true they are unable to admit a mistake.  It slows down progress IMMENSELY.

Oracle 911's picture

And your comment is the only reason why I upvote Roddy6667. Namely Chine is NOT anymore about the cheap copy.

roddy6667's picture

I live in China. My son-in-law works for an 3D Printer company. My daughter-in-law does marketing and distribution for a Chinese company with  factories in North Korea, My niece was wealthy before age 30 exporting clothing all over the world. Her sister got rich in construction. That sister's  husband builds residential housing. He is also wealthy.I have many friends here that are in manufacturing.

Where do you get all this "information" that provides your opinions? Have you ever spent time in China and observed life and business here? I don't think so. Do you read it in the American press? Do you make your decisions based on the low grade crap that is exported to America? Bear in mind that Walmart/JCP/Macys etc set the specs, not the Chinese factories.

In China they build fine Benz's, Audis, BMS's, Range Rovers, etc. They can make fine machinery and consumer goods. They do not ship them to America because Americans cannot afford the good stuff.

nscholten's picture

Everybody makes money until they don't.

Oracle 911's picture

I THOUGHT that I was clear about China. China is not JUST about cheap crap. I know that the Chinese are developing science and their high tech/fine machinery (few years back they sent man into space) for at least 20 years.

And also I'm very well aware of a certain facts: the US production capacities (not just them) are basically in China and the general US population cannot afford the "good stuff". Albeit I'm from Europe.

 

But my main point is this, in Chinese culture publicly admitting mistake means loosing face, which is for Chinese worse then death.

 

EDIT: The Chinese didn't came up with their own principles/concepts, they copied them and improved them. Which means they have to reform their own culture, to be more creative.

Homer E. Rectus's picture

Roddy, you economic traitor you...when things go to hell in Panda-land...and they WILL, those hungry coolies of yours will eat you as fast as they ate my mom's cat in San Francisco.

Oracle 911's picture

The Chinese CB will buy up the NPL and local gubmit debt, and then forgives them.

And then also changes the way how the money is created.

 

Lot of birds with one stone...

_ConanTheLibertarian_'s picture

Key is, they won't admit it but the problems will get noticed when the world receives much less shit from China.

r3ct1f13r's picture

I got dizzy after I read that. Seriously.

Edit: Twice

Pickleton's picture

"American weapon design has long been working towards lower yield and lower radioactivity, both initially and as a lingering side effect."

 

I read something recently saying that the future of nukes was headed for pinpoint, single person, type weapons.

ArmyofOne's picture

Mr. Wu make a good missle.  We shoot down all shorts. 

ArmyofOne's picture

Oh, and by the way, are these hypersonic weapons faster than the speed of light?

 

https://youtu.be/xYH_-XJ0dpY

chubbar's picture

OT, excellent article about a press conference given a few days ago in Russia that wasn't covered in the western press (shocking, right). Anyway, gives a lot of info on the fuck-fuck games the US has been playing with Russia trying to make them the bad guy of the world. Very insightful.

http://russia-insider.com/en/politics/russias-had-enough-no-more-busines...

roddy6667's picture

Have you ever noticed that most of the hit pieces on Russia are written by Jews? They are still pissed that their Bolshevik Revolution eventually failed and that Stalin purged the Jews. Seems like they all moved to America and work for the American media.

COSMOS's picture

THey are also pretty pissed off about losing control of Russias vast resources they got under Yeltsin.

roddy6667's picture

Drunken Boris gave away the countries assets, but Putin got them back. No wonder he is a hero in Russia.

Yen Cross's picture

    Unless you're long the 3x PLA Bodybag ETF?

lordbyroniv's picture

yellow people problems

NoWayJose's picture

Solly, but you mean yerrow peoper plobrem?

Sudden Debt's picture

Yep, once you're economy is becomming as bad as America's and your debt level is nearing the American level...

you just know you're fucked and the only sollution is default.

 

Tijuana Donkey Show's picture

Or war. War is a US cleanup tool for getting rid of unwanted "assets."

Soul Glow's picture

$185 billion reserve burn rate and it will only increase for February unless they give up and let their markets crash.  The reason they have to increase their spending is because in order to achieve growth they need to have the output not just remain flat, but to increase.  It is no secret their GDP is falling.  This spending is to make up for the gap.

Mintcoin's picture

You can't infinitely loan/borrow your way to prosperity. Eventually the Piper must be paid. It only works while there are still people able to borrow. Once everyone is in debt, and maxed, then it all come crashing down. You cannot get around it. Debt is the illusion of wealth... It is deception at it's finest.  You reap what you sow. The law of sowing and reaping cannot be avoided... It is a LAW!

You have to print money and devalue, or destroy your banking system. 

The only option for a clean banking system is to make fractional reserve banking illegal... Which would basically mean making central banking and most banks illegal. To borrow would have to come from private parties and real capital... Interestingly this is largely what was the civil war was really fought over...who and how the banks and money would be controlled...slavery was not the main reason for the civil war in the USA. 

Since most the world has been deceieved into the central banking

There is no way out. It is Print/ devalue or die. 

MSimon's picture

Borrowing to increase production has its good points. Up to a point.

Cabreado's picture

And false leaders will go unscathed.

Haole's picture

If anyone missed the first episode of the new X-Files, there is some very interesting predictive progrmming in it.  Almost too obvious but then again, so was their portrayal of 9/11 they aired on an episode a few months before it actually happened...

__Usury__'s picture

the Aliens are a metaphor for the isreali's..........that's the way I viewed it....

old naughty's picture

the aliens are among us.

the truth is still out there !

roddy6667's picture

That's not a new idea. Generally, Reptilians are metaphors for Jews.
Note my handle. I still have a case of those special sunglasses.

SixIsNinE's picture

right - so maybe this new episode has some too - Alex Jones has been raving that Chris Carter said he took AJ and Infowars as a major theme / background  to create this new XFiles.

That's pretty cool for AJ.   Did the Corporate Channels mention anything about that ?

 

 

OldPhart's picture

You're posting on Zero Hedge and still watch network television?  WTF?!

MisterMousePotato's picture

There've been times when I've wondered if I was the only one who ever heard, much less liked, this song. Masterful use of the Hammond organ and Leslie cabinet.

scintillator9's picture

Otep Shamaya has quite a way with screaming "There's No Way Out"

https://www.youtube.com/watch?v=1Mq-FFAEhoU

 

12357111317's picture

Richard Thompson  (We're all working for the) "Pharoah"

https://www.youtube.com/watch?v=KRtTkBdATS0

MisterMousePotato's picture

Wow. First David Gilmour and now Richard Thompson.

It really is an eclectic group of commentators at the Hedge.

V for ...'s picture

I think it is terrible, making a wage slave of someone who is obliged to make a fiat slave of someone else and they both lose.

END THE FED AND THE BIS AND THE BOE.

ISEEIT's picture

Being alive rejects this crap.

Time to flush.