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Bank Of America Charts The Four "Crash Landing" Systemic Endgames For China
While everyone's attention is focused on just what unconventional policy Benny and the Inkjets will pull out of their collective sleeves to prevent another financial implosion (fear not, something will appear), it is time to redirect once again to the copper plated elephant in the room, China, which last week became the target of a "Hard Landing" vendetta by Bank of America's David Cui (noted here). Well, the China strategist just fired a follow up shot with "Four systematic risks & potential for financial market turmoil." So, for all those who need one more nail in the "China Bubble" coffin here we go, first textually... "we have sensed that the financial markets in China have become increasingly unstable and that the risk of a hard landing is rising. In this report we outline four systematic risks that we believe have the potential to cause financial market turmoil: 1) private lending (a current issue); 2) property price correction (potentially over the next three to twelve months); 3) bank bad debt write-off and eventual recapitalization (potentially over the next two to three years); and 4) “hot money” outflows (event driven and highly unpredictable). Many of these risks are intertwined which is why we refer them as systematic risks, i.e. difficult to mitigate via diversification. As a result, we suggest investors remain defensive in their portfolio construction in the medium to long term (although we recognize that some short term tactical bounces in the market are possible after the recent sharp sell-off)." And, more importantly, visually...
Systematic risk I - Underground lending
Chart 7 below shows how things could potentially unravel rather quickly in the private lending market. We see two potential significant near-term risks: 1) a bursting of some Ponzi schemes; and 2) defaults of real-business borrowers, including property developers.
Our channel checks indicate that the prevailing interest rate in the private lending market is about 2-3% per month in Jiangsu and Zhejiang, or 24-36% p.a. We doubt many businesses can afford to pay such a high interest rate as a going concern. As a result, we suspect that there are mainly two types of borrowers in this market: Ponzi scheme operators and desperate business people. During the past tightening cycles, we saw some borrowers came to this market because they could find even higher-return opportunities elsewhere, e.g. business, property or stock.
However, this type of borrower seems to be largely absent this time. Given such high rates have lasted for almost a year by now (Chart 4), our sense is that the burden has simply become too much for some borrowers in recent months. While default happens in normal times too, we have noticed a sharp rise in frequency since August (Table 5): some Ponzi schemes have unraveled (Local mind & where has all the money gone? (Aug 27–Sep 2), Sept 2) and many business people have also defaulted, sometimes involving Rmb billions (Economic Daily, Sept 23; CNWEST.com, Sept 23).
The financial market may get significantly disturbed by this.
If there are enough defaults, many private lenders could exit the market. This could result in a credit contraction in the economy which may lead to incomplete projects, fire sale of assets by developers, depressed property/land prices, stress on bank’s balance sheet (because many loans in China have property/land as collateral; land value is especially important to LGFV loans) and ultimately a possible capital flight as investors/depositors lose confidence in the banking system (more in the capital flight section). This in turn may lead to further liquidation of assets, so on and so forth, thus potentially setting up a negative feedback loop.
In addition, we understand that many private loans are collateralized by property/land. When borrowers default, the chance is high that many of these collaterals could be put onto the market under duress at a time when the property market is particularly vulnerable (more on this in the next section).
Systematic risk II - Property downturn
Because of the price control policies implemented by the government since Apr 2010, it appears to us that the physical property market is softening as sales volume in the all important golden month (September) has been disappointing. Despite this, we doubt that the government is prepared to ease up on its policies any time soon. Premier Wen wrote on Sept 1 in Qiushi, one of the most important media outlets in China, that the government will be steadfast in implementing its property policies to ensure the desired effect is achieved (Who’s who in the news media, Aug 30). The head of research at Ministry of Housing said on Sept 8 that the government will not reverse its home purchase limit policy (Nanjing Daily).
We believe that for social, economical and political reasons, the government is unlikely to allow people’s expectations of property price appreciation to be built up again – we believe the consequences would be too dire: inflation expectations, property bubble, public outcry and a complete loss of policy credibility (Property – Not out of the woods yet, Apr 6). This is particularly so after the policy flip-flop in late 2008. As such, we ascertain that the risk of the government over-tightening this round is higher than a quick policy reversal.
On the other hand, demand is highly uncertain in China, in part, because we believe a significant portion of the demand is for investment purpose (Property, wealth effect & the unhappy Chinese, 28 May 2010). Although few have accurate data on the demand breakdown, investment’s influence can be seen clearly from the fact that property markets in cities with no home ownership control tend to be much more buoyant than those that have this type of control.
Unfortunately investment demand is fickle – investors only purchase properties if they think prices will move up (only a few cities in China have a vibrant rental market). It’s our impression that, at least in the major cities such as Beijing and Shanghai, investment appetite has become tentative and is probably likely to soften considerably, judging from the latest transaction data.
If investment demand fell off, we may see negative loops kicking in here too (Chart 8): lower transaction volume and funding pressure could lead to developers cutting prices, which would cause a drop in investors’ desire to purchase properties, which could add more pressure for developers to lower prices. When a few developers reduce prices, potential buyers may think they can pick up some bargains; however, when many developers cut prices, we suspect that even genuine buyers may suspend their purchase decisions. Another potential loop is the property price-banks’ balance sheet-capital flight route that we have outlined in the previous section.
Systematic risk III – Bad debt/bank recapitalization
We believe that the LGFV loan issue may be serious but not imminent as a concern as the banks and the government could delay the issue for a considerable period of time by “evergreening” some of the loans. Nevertheless, we expect it could ultimately come to a head, at which time the government may have to recapitalize the banking sector. Unless circumstances and events precipitate an issue, we look to 2013, i.e. when the new administration is in place, for some potential action on this front (Seven market driven themes in 2011, Jan 3).
The size is big – likely Rmb10tr+ by now
Different government bodies have announced different estimates of the size of LGFV loans by the end of 2010:
- Rmb9.1tr, according the China Banking Regulatory Commission (CBRC), the banking regulator;
- Rmb10.7tr, according to the National Audit Office (NAO); out of 1,636 counties in China, only 54 had no LGFV loans as of 2010 YE;
- Less than Rmb14.4tr (30% of Rmb47.92tr loans outstanding), according to PBoC, the central bank. Its report does not provide an exact estimate; it merely states that the borrowing by LGFVs in most places accounted for less than 30% of local Rmb loans outstanding.
Still expanding
CBRC has warned banks publically about LGFV risks since at least late 2009 (Loans, local government funding vehicle, 21 Jan 2010; Risky LGFV loans, 14 Oct 2010; Severe crackdown on LGFV loans, 24 Jan 2011) and periodically, it had stepped on the brake for LGFV loan granting (LGFV, 28 Jan 2010). Despite the apparent wariness by the regulator, the size of LGFV loans has been expanding at a fairly fast pace over the past year and a half (Table 8).
The reason is very simply in our opinion: the local governments simply don’t have enough resources to fund their spending, including investment in infrastructure, land bank and social welfare expenditures (The visible hand – A reform roadmap & what it means, 23 Jul 2010). To clamp down on LGFV loans completely would mean a fundamental change in the way that China manages its growth, i.e. less reliance on public investment and to be more driven by private investment and consumption. This most likely means a lower overall growth speed by our assessment. The willingness to continue to lend to local governments over the past two years or so was also compounded by the desire to see the stimulus related projects through to completion in case the associated loans go bad straight away.
What the risks are
Looking at the share price performance of the Chinese listed banks in recent quarters, it’s clear to us that investors are concerned about the LGFV loan risks that the banks are facing.
Hypothetically, if some LGFVs default, this could trigger asset liquidation, potentially lower land price and potentially more LGFV defaults. This may cause great stress to banks’ balance sheet. The impact of any default on foreign capital’s psychology, i.e. whether it will cause capital flight, is also difficult to assess (Chart 9).
The decision on the ways to cover any eventual losses will have some significant impact on China’s economy and the financial market we believe. If it’s done via government debt, it’s likely to be deflationary and may slow down growth. If it’s done via central bank’s balance sheet, it’s likely to be inflationary. The government has to manage the process very carefully to avoid any significant disruptions to the economy and the financial market in our opinion. We believe one of the reasons why the 2007-08 round of inflation in China was so difficult to control was due to central bank’s participation in the last round of banks recapitalization (A short history of inflation & market, 18 Nov 2010)
Systematic risk IV – “Hot money” outflow
It appears to us that there is too much consensus in the market that Rmb should appreciate. In reality, things in China nowadays are expensive by international standard largely due to inflation over the past few years (The poor poor Chinese consumers, 16 Nov 2010). As a result, we feel that the argument that Rmb is significantly under-valued may no longer be appropriate.
Interestingly, we have seen increasing signs of capital outflow from China (Local mind & where has all the money gone? (Aug 27–Sep 2), including mainland Chinese buying properties around the world and record high gaming revenue in Macau (Chart 10).
We suspect that at some point, the expectations for Rmb appreciation may change, due to weak exports, risk-averse triggered by some international events or a disturbance in China’s own financial market. When there is volatility in domestic financial market, we consider it highly unlikely that domestic depositors will run on the banks as it’s unthinkable to most that banks could fail and their deposits disappear. However, foreign investors and some of the more sophisticated domestic capital holders may vote with their feet. This may have the potential to trigger a chain of events as shown in Chart 11.
Bank of America's conclusion:
Would the government allow all this to happen?
Eventually, we believe that the Chinese government can handle any potential financial market turmoil in China this time because of high domestic savings. However, this doesn’t mean that the ride will always be smooth.
One of the biggest misperceptions about China in our opinion is a belief that the government is monolithic, and run by “a few wise men in Beijing” whose policies are followed to the letter. In our view this could not be further from the truth (A big misperception about China, 23 Feb 2010). Many policies in China are the result of negotiations and compromises between different interest groups, and the policies are often behind the curve and sometimes bring about unintended consequences.
Our overall thesis is that the government has been too aggressive applying both monetary and fiscal stimulus to counter the last global financial crisis and that we are now living with the unintended consequences, chiefly among them economically, high inflation pressure and instability in the financial market.
In addition, it appears to us that in the near term, government policy options are fairly limited. If there is another round of global or domestic financial crisis, running a loose monetary policy again may be too inflationary; identifying more viable “mega” fiscal projects may prove too difficult; and turning around the property policy may create a property bubble that China has never seen before by our assessment. Because it would re-enforce people’s perception again that there is a policy put in the property market.
That said, if inflation pressures ease more rapidly than we currently anticipate, it may give the government more space to maneuver in terms of handling fresh disturbances, including those we expect in the financial market. This is probably the biggest risk to our thesis presented in this report.
Said otherwise, Bernanke, should he hit print once again, and export copious amounts of inflation to China once again, he will promptly put an end to the whole mercantilist-ponzi symbiotic relationship and force the global reset.
Perhaps, for the sake of restarting, it is best to just let Benny do what he does best: that is print.
full report:
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What the fucking joke. Never expect truth from criminals at BAC.
Speaking of BofA, their home page appears to be down again today.
Uh, no. It's just "slow". Slow as in, "Your transfer may require 3 months to process"
Where is the Chinese eCONomist charting the hard landing for Bank of America?
It is like a gay man, still in the closet, outing another gay man.
or prositutes calling each other HO"S. Can't figure out which turd fits.
And have China charted the 4 "crash landing" scenarios for Bankrupt of America ?
No need. Chinese telling Americans "Yuana try me?" If they pass this bill Treasury market tanks within a year.
Or perhaps, "Do you Renminbi me ?"
Such a lyrical day. First, Nothing for Money, then Benny and the InkJets. Now this.
Does anyone know when the fat lady will sing?
Please, leave Mrs. Obama out of this
the fat lady ain't singing today, she's got a ham sandwich stuffed in her mouth, a crane is lifting her out of the house, and she's soon to be dumped in the financial abyss next to pseudo-osamas fish eaten carcass
You must have been playing with your pork chop and missed her singing "A Hard Rain's A-Gonna Fall". I can hear it right now. And it's getting louder. It's probably the Doppler Effect why you can't hear it.
Doppler perhaps, I think it's simply that occasionally I stick my fingers in my ears for a bit of sanity.
Ho runs China, Wen the Army.
Bank of America should be focused on analyzing the Four Crash Landing Systemic Endgames For Bank of America.
you is dumber than dumberer. bank of amerikan pie has the most loyal costomer base that will step in and resurrect their empire: the US taxpayers. now you might say that timmeh geethner don't pay no taxes. oh yeah? but YOU DO! hahahahahahaha! wait a minute...
+1 on the "wait a minute..."
Shouldn't B of A be swamped preparing their OWN landing gear?
They don't have any landing gear. They are going headlong into a mountainside of debt. They need to put their head between their legs and......well you know the rest.
I call bullshit
I've called bullshit many times. AND that fucking Ben never answers the phone.
kettle pot black
Meanwhile, BAC is on course to crash land into 4 dollar stock values
".4" Fixed it for you...
Thanks, I'm just an optimist I suppose...
realist here. :-) "BACQ"
isn't this the american pot calling the chinese kettle black?
I find it hilarious that we're passing a bill to condemn the Chinese "devaluing their currency to favor their exports."
What the hell has Bernanke been doing since 2008?
divine comment
More kabuki theater, China and the U.S are in on this together and have been for a very long time, TPTB in both countries are quite prepared to kill off as many serfs as they need to in order to make those balance sheets right and get back to growth.
Hedge accordingly.
I have this smart friend who, when I mention the dance card and war, likes to mention that we wouldn't go to war with X because X has a bunch of nukes. Of course, if war is to be used as a way to cull the herd, and if both countries are, more or less, OK with that, there is no reason why war can't happen between two nuclear super powers without the use of nuclear weapons. China has even more reason to cull the herd, no? The one child policy has created a disproportionate number of men in their society. Nukes won't solve that problem. China needs to send their peasants to a ground war.
Proof that nukes are irrelevant is that neither Baghdad nor Kabul were nuked, even though the justification for both wars was that our survival was at stake. Nor were any caves or hideouts. Which means I agree with you, but take off your nuke glasses, they are darkening your already very clear vision and proving your point even more.
You mean, this isn't a BA report talking about themselves? ;-)
they should know the warning signs.
The only hard landing will be that of the mass BAC executive window jumpers when their golden parachutes fail to deploy. Nobody wants to hear their hypocritical drivel.
Man I LOVE flow charts!
That's why GOLD just collapse. 60$ shaving.
All the way to 1610...
BAC going broke and suddenly they are the "experts" on China??
What they're advertising is that they are shorting China in HK and NYC, and they want more jumping on their get-rich-quick trade. What happens behind the scene is the story that they wouldn't want to tell you.
Experts not on China, but on crash landing and not suddenly, but since their own crash landing back in whatever who cares anymore.
'Systemic risk 3 - Bank Bad Debt write off' - Ha Ha Ha Ha Ha - lucky that's only a risk for China. These guys kill me, honestly.
http://www.nakedcapitalism.com/2011/10/on-todays-bear-market-and-the-expected-central-bank-liquidity-train.html
On today’s bear market and the expected central bank liquidity train
some charts reading instead.
I was visiting with my brother in law a couple of months ago (who is a product engineer for a large corporation) and he was relating a story about a buddy of his who quit the company he works for to go to work for BAC. I asked what this guy did and my brother in law says he's a big IT systems guru. It seems that BAC is trying to develop what sounded to me like a HFT system platform, from what information my B in law had heard directly from this guy.
This was something that was started in the past year, at least that was my impression. My comment to my B in law was that BAC is insolvent and it sounded like his buddy had left a solvent corp for an insolvent one, regardless of the pay increase. My B in law had no idea the trouble that the banks are in and doubted his buddy did either.
I just found it interesting that BAC was spending millions trying to get into the HFT business. Does anyone have any knowledge of this and why they would be going in this direction?
They better start quote stuffing BAC quick... otherwise we could see $4 by Friday.
Not to push facts into this discussion, but China has slowed just like the Chinese authorities intended as they have raised rates several times over the past year. Where's the surprise the blowhard's are talking about? The US financial blowhards love to take down China at every opportunity to distract from the bankrupt US economy. Now that things have cooled somewhat in China, they can hold off on the rate increases (and possibly reduce rates) and the economy will pick up again.....just like they planned.
stateside
That said, if inflation pressures ease more rapidly than we currently anticipate, it may give the government more space to maneuver in terms of handling fresh disturbances, including those we expect in the financial market. This is probably the biggest risk to our thesis presented in this report.
The USD will devalue against the Yuan just like the USD did to the Yen.
China is in for decades of deflation.
The only question is can the US get international help in supressing gold so it doesnt become a safe haven.
The currency trade bill will pass and it will be used to devalue against the Yuan rapidly. At least thats what i think.
The market will have to stand alone in October is looks like to me: "We currently have no plans in place for QE3. Though nothing is off the table but we have to monitor the economy...."
As for systmeic risk, Bernanke is a retard. I wish just one Congressman would have asked him what would happen to all those derivative bilateral contracts if BAC goes B.K. and they cannot bail them out?
Of course, Geither and Bernank will approach Congress again as Paulson did, but still when you have one of the largest banks by deposit, Bank of America, selling at less than 30% of book value, with a possibility for a real run on the bank, notwithstanding the counterparty risks with Europe, there is more than ample room for banking systemic risk to go parabolic in the U.S. again.
Bernanke is a liar and is disengenious. I know that's nothing knew but he makes me sick. The Fed is fully audited? Tell us, then, Ben, what the fuck is on the "other" line item on the Fed balance sheet? Just what?
BTW, we are fucked. These Congressman are fucking pure sheep.
Ring Ring...Ring Ring...click...
"Sorry David Cui can not be reached for comment. He is currently at the withdrawal window closing his BAC account. Please leave a message and the assigned US government bailout representative will return your call...maybe."
...click..."in box full...good-by."....click.
speaking of China-
China warns of trade war if US bill passes
Kubaki theater, TPTB in China and the U.S. are quite prepared to kill off as many sheep as need to be in order to restore their respective eCONomies to healthy growth numbers. I'd like to be optimistic, but 2000+ years of human history tends to say otherwise.
There is a similar scenario put forth by Chinese financial bloggers. The "zerohedgers" of China think their country is run by Keynesian imbeciles who are delivering China's economy on a platter to the U.S. And that the Fed and USG are orchestrating a deflation to kill China. That's why I love reading them, it's a mirror image of the U.S. view! In truth, politicians cannot control the market: they are all idiots on a path of destruction.
It's not inconceivable that China could face exchange rate generated hyperinflation if the flow of U.S. dollars slows. Credit doesn't have to turn negative, it's growth just has to slow, as the 2007-2009 crash in housing and financial markets shows. Also, remember that the wealthy are pulling their money out of China. PBOC has grown money supply much faster than USD, they must have U.S. dollars or other assets behind the currency to prevent a massive deflation. If they have been buying euros and hard assets, their reserves are dwindling as USD rises and exports are headed down in a global recession, slowing the flow of USD.
I covered two recent blogs along these line: 6 to 10 months to Chinese hyperinflation http://investinginchinesestocks.blogspot.com/2011/09/liu-jun-luo-six-to-ten-months-until.html
(this one fully) Operation Twist & U.S. Strategy http://investinginchinesestocks.blogspot.com/2011/10/liu-jun-luo-on-operation-twist-us.html
BAC will continue with the Chinese hit pieces until China buys BAC stock
Cone of Uncertainty Charts The Four "Crash Landing" Systemic Endgames For BAC:
1. BAC is Fucked
2. BAC is Fucked
3. BAC is Fucked
4. BAC is Fucked
Soft dollar agreements are available.
once BAC is below 5bucks it's OVER!!!! an avalanche of selling will commence instantly and that is it ladies and gents!
It would be Nice if Ben and the Fed would address this problem. Will Ben be bailing Europe and China as well? Systemic problems seem to be everywhere, including at B of A, and the rest of these derivative laden entities who are on QE life support.
"Benny and the InkJets". Very clever!
Would be interested to see research report on the possible impact of Chinese reductions in Treasury purchasing as a result of their domestic challenges.
Bingo! The article says they have a lot of savings with which to fill their gaps. Unfortunately, so much of that savings is in treasuries.
"Pot calling the Kettle black."
LMAO
As I noted before , chinese "hard landing" is bankster wet dream. They keep pic of Chaisatan on the wall and jerk late night on chinese "hard lending". Besides main goal to buy any valuable assets (with fresh printed USD) available after this great crash, they would very much like to do that on big scale in China of course.
Now we withness 3rd huge collosal leg of the greatest crisis where they are downgrading whole EU , at same time starting trade wars btw USA & China ... conslusion is logical - target is China which should loose all export markets if possible . Of course just after inflation cycle was ramped up last year and now reversing , rising USD (yuan pegged!! = chinese products too expensive)
Full scale financial war with citizens all over globe screaming - but who cares for citizens
I know I'm an ass, but I have to ask, is your last name Humper?
Is it just me, or does this look like BAC did a Ctrl-C, Ctrl-V of the problems we had and have here in the US?
China will be here 1,000 years from now.
BofA will not be here 1,000 days from now.
Hi Tyler,
I like that you call Ben Bernanke et al. for "Benny and the Inkjets".
Well done! Thank you very much for professional templates and community edition sesli chat sesli sohbet