China is upset with “speculators.”
You see it’s not that China’s economy is “landing hard” and it’s not that a massive yuan devaluation is almost a foregone conclusion. No, it’s that “manipulators,” “speculators,” financial “predators,” and all sorts of other nefarious foreign meddlers are colluding to destabilize the country’s economy and financial markets for personal gain.
If it were up to the Beijing, this gang of evildoers would be rounded up and jailed until they agreed to confess their “crimes” on live television. Either that or they'd simply disappear into the bowels of the Politburo. Unfortunately for Beijing, the Chinese can’t arrest George Soros (who one Chinese media outlet recently called a “crocodile” for daring to place a bet against the yuan) and they can’t arrest Kyle Bass either.
As regular readers are no doubt aware, Bass is betting on a meltdown in China’s mammoth banking sector which he says will need to recapitalized. China, Bass figures, doesn’t have nearly enough in reserves to pay for a banking sector bailout and will thus need to do QE on a massive scale to plug the holes. That, he says, will eventually lead the currency to fall 30-40%.
China has fired back at Bass and at Soros over the past several weeks via a series of hilariously absurd “Op-Eds”, the latest of which (out this morning) is entitled “Groundless, unfair to blame China for hardship.” “Pessimists misunderstand the Chinese economy, or they just choose to turn a blind eye to the bright spots that really matter," it reads.
Right. You want to focus on “the bright spots that really matter” instead of depressing things that really don’t matter, like collapsing exports or the fact that the banking sector may be sitting on $3.5 trillion in souring loans.
Thankfully, there’s at least one source who is willing to take a glass half full approach to assessing the situation and that person is Mao Junhua, who you know isn’t biased when it comes to analyzing Chinese banks because he works for - CICC, a Chinese bank.
“China’s bad-loan problems are ‘not as serious as’ Hayman Capital Management’s Kyle Bass claimed earlier this month,” Bloomberg writes, citing a report by Mao. “10 trillion yuan ($1.5 trillion) is the most that banks could lose from soured credit in an economic hard-landing scenario [and] that’s less than half the $3.5 trillion potential loss flagged by Bass.”
Obviously Mao’s figure is wildly optimistic. If he’s right, it would mean that in a worst case scenario, NPLs would only rise to 5%. If we’re being honest, they’re probably already above 10% and it’s getting worse all the time as evidenced by the growing number of bankruptcies we’ve seen over the past nine or so months.
In fact, even the headline number (which is even less reliable than an NBS GDP print) is on the rise.
“Soured loans at Chinese commercial banks rose to the highest level since June 2006 as the nation’s economic expansion slowed to the weakest pace in a quarter century,” Bloomberg reported earlier today.
NPLs rose 51% from a year ago, hitting CNY1.27 trillion yuan ($196 billion) by December. That's the highest level since Q3 2006. “The bad-loan ratio climbed to 1.67 percent from 1.25 percent, while the industry’s bad-loan coverage ratio, a measure of its ability to absorb potential losses from soured credit, weakened to 181 percent from more than 200 percent a year earlier,” Bloomberg continues.
"NPLs increased by 88.1 billion yuan over the last three months of the year," Reuters adds. "Special mention loans, referring to debts that could potentially turn sour, rose to 2.89 trillion yuan, the regulator said, an increase of 80 billion yuan from the end of September."
And while special mention loans gives us a bit more clarity on what the "real situation" (to quote the NBS) is, there's no way of knowing how many loans have been rolled and thus not counted as souring and perhaps more importantly, there's no way of knowing just what the figure would look like if it included bad channel loans that are carried as "investments" on banks' books.
But before you go following Bass and Soros over to the dark side where "speculators" conspire and plot to bring down the Chinese economy and destroy the country's financial markets, consider the following message from Xinhua:
“It is groundless and unfair to blame China for the global slowdown and market volatility, and naysayers' misjudgments highlight their ignorance on the world's second-largest economy."