China Faces 15 Trillion Bombshell As Shadow Banking Sector Collapses

Tyler Durden's picture

We’ve spent more time than most documenting China’s wealth management product problem.

WMPs are part and parcel of Beijing’s sprawling shadow banking complex which, until 2014 that is, helped pump trillions of yuan into China’s economy and shouldered the burden when it came to propping up the most important economy on the planet.

But WMPs are dangerous. In fact, we flagged them as an 8 trillion black swan back in August on the way to asking what would happen if China’s shadow banking sector were to collapse altogether.

This is space that’s running what amounts to an enormous maturity mismatched fraud. Of course the describes the entire fractional reserve banking system, but in the case of China’s WMPs, it’s all on the verge of implosion. Don’t believe us? Just ask anyone who bought into products sold by Fanya Metals’ Shan Jiuliang.

This is a very real threat to the Chinese banking sector. The multifarious nature of the space's liabilities makes it virtually impossible for anyone to assess what the embedded risks are. As we first documented last summer, some 40% of credit risk is carried off balance sheet and that figure might well have grown recently, especially considering mid-tier bank's propensity to extend new credit through new cateogries of channel loans that are classified as "investments" and "receivables"

In any event, China is desperate to revive the credit impulse and that means keeping the shadow banking space alive. Here's BofA with more on China's ticking WMP time bomb:

  • Growth rate accelerated. By the end of 2015, WMP balance reached Rmb23.5tr, up 56.46% YoY. Astonishingly, growth rate accelerated last year compared to the year before despite a high base – in 2014, the balance grew from Rmb10.2tr to Rmb15.0tr, up 47.25% YoY. The key drivers of this accelerated growth are joint stock banks whose WMP balance rose from Rmb5.67tr to Rmb9.91tr, up 74.8% YoY; city commercial banks, Rmb1.7tr to Rmb3.07tr, up 80.6% YoY. On the other hand, the big four state-owned enterprise (SOE) banks’ balance rose by a more moderate 53.2% YoY (from Rmb6.47tr to Rmb8.67tr) while foreign banks’ balance declined by 25.6% (from Rmb0.39tr to Rmb0.29tr).

  • Liquidity risk is rising. The outstanding balance of open WMPs, of which buyers can subscribe or redeem largely at will, reached Rmb10.32tr, up 96.95% YoY. They accounted for 44% of bank-run WMPs balance as of Dec 2015, up from 35% a year earlier. The increased share of open WMPs adds to the duration mismatch in the shadow banking sector and makes the system more prone to liquidity shock in our view. In 2015, banks issued Rmb158.41tr worth of WMPs, i.e., Rmb13.2tr a month on average. If WMP buyers decide to ‘go on strike’ for whatever reason, a liquidity crunch in the shadow banking sector could quickly develop in our view.

  • Implicit guarantee still largely in place. Only Rmb1.37tr worth of open WMPs, representing 13% of the total, are priced based on NAV. Also, the portion of closed WMPs that are priced similarly is tiny. This means that the vast majority of WMPs are still sold with the so-called “expected return”, which is largely viewed as promised return by WMP buyers by our assessment. In 2015, only 44 WMP products, or 0.03% of matured products during the year, caused investors to lose money. This loss ratio appears unusually low in our view. It is interesting to note that most of the 44 products were sold by foreign banks.

  • Individual buyers still dominant. As of Dec 2015, individual investors, including high net-worth individual investors, accounted for Rmb13.34tr WMP balance, or 56.6% of the total (institutional investors, 30.6%; inter-banks, 12.8%). They subscribed to Rmb101.49tr of the newly issued WMPs during the year, representing 64.1% of the total. Mood of individual investors are more volatile than institutions in general.

The bottom line is this: if this implodes, it will not only tank the entire Chinese banking system but the global economy as well, as the amount of liabilities here is quite frankly enormous. 

 

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Calmyourself's picture

Has " collapsed", May "collapse" perhaps a "collapse" in our view should "collapse" if this "collapses" Umm thinking collapse is tired, needs a break Tyler..

NoDebt's picture

Agreed.  It's a command-and-control economy and it won't collapse overnight any more than the United States' command-and-control economy will.  PLENTY of supplicant sheep still lining up, waiting to be told what to do and what to believe.  They can't imagine, nor do they want to imagine, a world where the god of all-powerful government isn't actually in control of everything, guiding them benevolantly to the next safe pasture.

 

 

Global Observer's picture

In 2008 Western banks were allowed to mark their assets to "model" (meaning it can be anything they want) rather than to market, which would have meant they would have to declare insolvency and a systemic collapse. Not sure why China can't use the same trick to prevent their banks/shadow banks from collapsing. What is good for the goose, is good for the gander.

All the idiots predicting an imminent collapse of the Chinese economy pretend that accounting conventions are some inviolable god-given rules while they are violated/suspended temporarily everywhere every time the impact of enforcing them is bad and systemic, until a way is devised to minimise the impact and make it localised rather than systemic. In the West they decided not to put any mechanisms in place to contain the impact the next time there is a banking crisis, but that is another story.

mvsjcl's picture

You are in default only when the bank tells you that you are in default.

DownWithYogaPants's picture

We're all physical beings who work based upon physical principles.  What that means is the laws of physics apply to human interactions as well.  But because what we perceive as events are embedded IN the interactions we see them as taking a long time.  However looked at from outside on a longer time scale things become much more like physical laws of conservation.  From this I deduce that this China thing will fail and add the spin that it won't be that long.  They're going to do a Japan or worse.  While they may avoid putting an ugly label on it they'll have their crash / default nonetheless.  Somebody will get stiffed.

Squid-puppets a-go-go's picture

yers, with infinite willingness to debase currency and extend/pretend - even altering the very laws of accounting to enable it, there will be no collapse. The juggernaught's engine is broken, it grinds on gradually losing momentum (capital)

The only potential Ice-9 moment might come if the merchant banks - even despite mark to unicorn accounting - become fearful of lending to each other, suspend transactions in suspicion,and  escalate the reprizal mistrust to a freeze of global payments systems.

Element's picture

Can I mark my personal debts to model too?

Why not? 

/pout

Global Observer's picture

 

Can I mark my personal debts to model too?

Of course, you can! But you mark your assets to model/market, not liabilities. The difference between the banks and you is that the banks' IOUs (balances in the customers deposit accounts) are accepted as money whereas yours are not.

Muh Raf's picture

Mark to model is for OTCs and other non-market priced products. It's been like that forever and the main issue is how representative are the models? The next big question is does it matter if the transacting parties agree?

Global Observer's picture

 

Mark to model is for OTCs and other non-market priced products.

That is normal accounting practice. But it is up to the regulator. Regulator can allow the institutions to mark them to anything.

The next big question is does it matter if the transacting parties agree?

It doesn't and that is my point. Technically insolvent banks can be treated as if they were solvent by the regulators and the rest of the world will be none the wiser for it. The West did that with its banks in the last crisis and China can do it with its banks now. Pretending that Chinese banks will inevitably collapse is silly. They will collapse only when their regulator doesn't mind the collapse.

Element's picture

That's great if the rate of exchange is not in question when it comes to material trades for actual stuff.

That's where mark to fantasy all falls down.

You can pretend it doesn't matter, you can pretend its all good, but if I won't accept your proffered settlement means, sorry, you go without.

This is not actually OZ, you do in fact have to pay me what I want to get what you want, and I have to trust that your promises to pay on my claims for what I want, via your worthless trinkets, will actually get me what I want.

If I can't trust you because you're a fantasist who thinks trade is based on whatever you say it is, you're going hungry.

I'll sell you a secondhand cardboard box to live in when you get desperate if you pay me with your daughter, have we got a deal?

I'll even throw in a shovel to assist with disposal of your bum-riots.

Let's see how you do.

Element's picture

OK, but do I care about that, if my debt is mark to model?

er ... no.

Global Observer's picture

 

The only potential Ice-9 moment might come if the merchant banks - even despite mark to unicorn accounting - become fearful of lending to each other, suspend transactions in suspicion,and  escalate the reprizal mistrust to a freeze of global payments systems.

That may be true of Western banks, but not Chinese banks/shadow banks. Payments to and from Chinese banks/shadow banks will be cleared by PBoC which can pay in any currency the recipient chooses given its vast foreign currency reserves.

The BIS settled transactions may freeze if Western banks freeze up. Then the New Development Bank (the BRICS Bank) will become the clearinghouse for transactions not involving the West. Of course, that settlement will not involve Western currencies either. The global trade will not cease, it will simply move to being priced in and settled in non-Western currencies.

Sandmann's picture

Ultimately Chinese banking rests on US Treasury holdings UNLESS they can get the Renminbi as a Reserve Currency first.

Western Banks were allowed to define their "Assets" before marking them to model. The basis of those Assets was US Dollars which the US Fed supplied in infinite quantities to keep liquidity available and avoid a Dollar Shortage.

By doing that they increased the Leverage available to support another two or three rounds of Pump Priming rather than disinflate the Asset Bubble. The prospect of playing the same games again is remote 8 years later

new game's picture

when someone doesn't get paid for work, then it starts to daisy chain the collapse.

same with materials. right now they are in the phase of using credit cards to pay maxed credit cards. eventually this gets interesting. eventually it get to the human level of no pay mofo and dont comein again, the place is broke...

roddy6667's picture

Tyler sees a few percentage point variation in a one day chart to be a "collapse". Chicken Little. Sky.

Kirk2NCC1701's picture

Tell him to look at these two charts, and to deal with the cognitive dissonance:

 

1. http://www.kitco.com/charts/popup/au1825nyb.html  (5 yr chart for AU)

2. http://www.kitco.com/charts/popup/au3650nyb.html (10 yr chart for AU)

Now look at these:

3. NYSE:  http://forecast-chart.com/historical-nyse-composite.html

4. Key World Markets:  http://stockcharts.com/freecharts/historical/marketindexes.html

Looks like a person needs to Diversify or get taken to the Abattoir, because we know what happens to one-trick ponies, don't we?

OldPhart's picture

Hang Seng +105

Shanghai +5

Sensex (whatever that is) +513

Looks like Shanghai is frozen.

Global Observer's picture

 

Sensex (whatever that is)

It is the Mumbai (India) Stock Exchange, recently acquired by S & P.

Yen Cross's picture

 Well Done . %>centages> work better for traders.

   numerical values are meaningless, unless you understand, what they're %percentages of?

DarkLordofSadNews's picture

Hate  the new autooplay feature ?.

Saddam Miser's picture

Let 'er rip. I'm ready.

Mr Poopra's picture

Stick to making trinkets chaps.  Finanical chicanery and fraud are our specialty.

Monetas's picture

A saddam wiser girl .... a great song from the Music Man ?

Proctologist's picture

Looks like the Chinese went to the Goldman Sachs school of ponzi.

TBTF? Let's see how crony communism works!

Oldwood's picture

As I understand economic theory, it is debt that defines wealth. So that should mean that China is rich indeed, and the new financial products to be invented by Goldman will be incredible. The financial industry is SAVED!

Ditch's picture

Ponzi schemes again. How about we abreviate  that plural to something shorter and more fun, like Ponzai or Ponzite. Ponzai is like Bonzai which would be very insulting to both cultures :)

Boing_Snap's picture

I agree lets take it right down to Pee scheme, seems to be a descriptive of equal worth. Poo scheme works too.

jomama's picture

Gotta hand it to them, their stock market is only down 24% on the year!

NoDebt's picture

Yeah, well, um, there is THAT, isn't there?  Fortunately nobody in China owns stocks, unlike the US where such a situation would be the clarion call for a violent armed revolt by the 401k class.

Er, uh, something like that.

roddy6667's picture

10 % of the Chinese are in the market, unlike America. Banks, life insurance companies, pensions, etc are all in the stock market.

TVP's picture

Chinese .gov encouraged its people to own stocks leading up to the July/August 2015 crash.  

Heard a sad story on the radio at that time about a chinese couple who invested their life savings near the peak - lost it all, in a matter of weeks.  

Good news is .gov let them live since they didn't attempt to short...

 

 

roddy6667's picture

This is the Shanghai Composite Index. Click on "MAX".

https://search.yahoo.com/search?p=shanghai+composite+index&fr=uh3_financ...

 

Where's the problem?

Global Observer's picture

No one in China who cannot afford to lose the money is speculating on the stock market. Chinese stock markets crashing is good for the Chinese economy, people will spend on increased consumption the money they would otherwise have speculated on stocks.

roddy6667's picture

You go to the casinos in Macau, or you put a big sum of money in a trust for builders at 18%. It's all gambling. Nobody feels bad when these people lose a bundle. People who need their money don't do these things. It's fun money.

Dragon HAwk's picture

Nobody is talking about the rates on all those shadow banking Loans, I've heard some pretty outrageous figures,  totally unsustainable pozi for sure

onmail1's picture

There was a pussy cat

which was also a copy cat

the pussy cat copied & copied

then oneday on the roof 

it tried to jump too far

and fell down below totally  flat

khnum's picture

should of stuck with cockfighting and mahjong as primary investment vehicles

the.ghost.of.22wmr's picture

Well harvest my organs!

 

Who decided to elevate China financially and let them steal nuke secrets again? The Clintons?

lucky and good's picture

Time and time again history has shown that when an economy has overbuilt, over leveraged, and over reaches a reset occurs. China is in a situation similar to what America faced in 1929 following a period of rapid growth and credit expansion.

 China is attempting to remake their economy rely less on investment and exports and more on their own consumers. This is a major shift for China's economy and we should not be surprised if China's leaders are unable to make the transition  in an orderly fashion. The article below delves into this issue.

 http://brucewilds.blogspot.com/2016/02/chinas-economy-policy-akin-to-pushing.html

Bazza McKenzie's picture

Their problem is that you can't get consumers to expand consumption when investment (and jobs) is contracting.  They actually reduce consumption.

So once investment starts contracting, you only get rebalancing to the extent investment drops faster than consumption -- but you still have a contracting economy.

Yen Cross's picture

 This party is getting started. I think eur/jpy is headed back down to 111.000

 Yep-ola, those '12 lows.n more

  These Yellenite- Shape Shifters, can take rates down, but the serfs will save even more.

joego1's picture

It won't fuck up my personal bank. I learned it on ZH.

Wahooo's picture

Your deposits are backed by the FDIC. Not to worry.

Uranium Mountain's picture

When they run out out US Treasury Bonds to sell, then what?  Sell their gold?   Wait, hold out until the world collapses first then bring out the piles of gold.  

MSimon's picture

Factory machinery fire sale?

xray vision's picture

Maybe I could pick up a skid loader or back hoe cheap?  Maybe ship it cheap to Texas in one of those empty container ships.

 

Element's picture

 

 

"The bottom line is this: if this implodes, it will not only tank the entire Chinese banking system but the global economy as well, as the amount of liabilities here is quite frankly enormous."

 

Really? How's that sea borne traffic look?

Chicken or egg?