China's 'Non-Performing Loan' Nightmare

Tyler Durden's picture


China’s credit risk is rising, probably much more rapidly than the official non-performing loan (NPL) statistics indicate. SocGen is concerned as they think we are only seeing the beginning of the end of this NPL cycle. While they do not anticipate an outright banking crisis, as the government will certainly keep intervening at each turn on the way to avoid such an outcome, this is no reason to feel relieved. The reason being a major structural element in China's NPL cycle as many industries have massive excess capacity - after years of aggressive expansion that ran way ahead of demand growth - which eventually has to be eliminated. This process will take some time, during which faster depreciation in the form of deleveraging and consolidation will be unavoidable; and while expectations of an imminent hard landing may be overdone, the landing will nevertheless be multi-year and bumpy in their view.

Societe Generale: The NPL issue is rearing its ugly head

According to the China Banking Regulatory Commission (CBRC), total NPLs at China's commercial banks reached CNY 456.4bn at end-Q2, 4.2% qoq and up 11.9% (or CNY 48.6bn) from the trough in Q3 11. The NPL ratio was unchanged at 0.9%, due to a similar pace of loan growth. However, special-mention loans that are doubtful but still performing increased to CNY 1.5tn, while the total loan loss reserves set aside were CNY 1.3tn.

Some places are doing much worse.

A bottom-up search returns an even more worrying picture. The number of stories on companies in default or with severe cash flow problems has surged since early Q2.

The economic slowdown does not seem to be the only cause, and, in many cases, not even the major one. The common mistakes include involvement in speculative activities (eg. property speculation or commodity trading), massive capacity expansion (eg. shipbuilding and solar panel manufacturing), outsized commitments to complicated webs of mutual loan guarantees and high exposure to underground banking (eg. many SMEs in Zhejiang).

More NPL woes ahead

The history of banking crises suggests there is no definitive linear correlation between the peak of NPL ratios and the scale of the pre-crisis credit boom, as it also depends on how the situation is contained and resolved. In the sample of 42 crisis episodes complied by Laeven and Valencia (2008), average annual credit growth to GDP prior to the crisis was about 8.3%. Between 2009 and 2010, this same ratio for China reached 27.8% and 20%, respectively. It is hard to see how China’s NPL ratio could stay at the current level.

There is also a structural element in China’s NPL cycle. As we pointed out last week, many industries have massive excess capacity after years of aggressive expansion that ran way ahead of demand growth.

Eventually, China has to eliminate these inefficient capacities. This process will take some time, during which faster depreciation in the form of deleveraging and consolidation will be unavoidable (and margin compression has already begun).


Acute agony or chronic pain

The exact trajectory and the end point of the NPL issue will be difficult to predict. Economies with less government intervention, such as the US, usually see NPLs peaking one or two quarters after growth troughs. In contrast, Japan was very slow in recognising and resolving its NPL problem – a problem which started in the early 1990s. The NPL ratio didn’t peak until 2002, and much damage was done in the meantime to the banking system and indeed to the overall economy.

China, where the government is even more involved in the economy, is running a clear risk of a prolonged NPL cycle. Local governments have poured millions of capital into rescuing failing corporates.

We think, at the end of the day, the central government will have to take the burden onto its own balance sheet as the NPL cycle reaches its final days of reckoning. The fiscal cost will only be higher the longer the process drags on, and a bigger concern is that more resources may be locked in these non-performing assets.

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Tue, 08/28/2012 - 15:32 | 2744467 francis_sawyer
francis_sawyer's picture

Rub some Tiger Balm on those non-performing loans...

Tue, 08/28/2012 - 15:40 | 2744489 Newsboy
Newsboy's picture

Maybe some careful acupuncture...

Tue, 08/28/2012 - 16:22 | 2744556 Hype Alert
Hype Alert's picture

So China has too much capacity.  And a billion people to create even more capacity.  Bernanke is trying to prevent deflation.  If China puts all the people to work building "stuff" and then floods the market with it, Bernanke has a massive problem.

Tue, 08/28/2012 - 17:09 | 2744646 francis_sawyer
francis_sawyer's picture

Jack & Jill went up the hill to have a little fun...

Stupid Jill forgot her pill & now they have a son...


Tue, 08/28/2012 - 17:53 | 2744726 stocktivity
stocktivity's picture

Little Jack Horner...sat in a corner...

   because he had a square ass

Tue, 08/28/2012 - 15:34 | 2744472 phyregold
phyregold's picture

Where is everybody getting their physical gold from?  I'm getting charged 10% above spot around here.

Tue, 08/28/2012 - 15:37 | 2744478 Xibalba
Xibalba's picture

a small price to pay to exit the corrupted fiat 'system'

Tue, 08/28/2012 - 15:38 | 2744481 phyregold
phyregold's picture

10% above spot...... yeah, good luck.

Tue, 08/28/2012 - 16:25 | 2744560 Hype Alert
Hype Alert's picture

And how much below spot do they want to ding you when you sell it?  If it's another 10%, you'll need 20% rise in gold price to break even. Or there about.

Tue, 08/28/2012 - 17:11 | 2744652 malikai
malikai's picture

Where are you? Here in London it's £50 over spot at my favourite dealer.

Tue, 08/28/2012 - 15:41 | 2744490 resurger
resurger's picture

Check multiple gold retailers, they have different premiums on spot.


Tue, 08/28/2012 - 16:17 | 2744548 francis_sawyer
francis_sawyer's picture

Try Davy Jones Locker... No premium at all...

Tue, 08/28/2012 - 15:46 | 2744509 malek
malek's picture

If you're buying by the troy ounce, you should see premiums between 3% for gold bars and 5% for American Eagles.
Google for local coin dealers or choose one of the big online dealers (Apmex, Tulving etc.)

If you buy local, or just in general, inform yourself about coin sizes and weights (if not pure gold) and get a good digital pocket scale such as the SM-501 (500 X 0.01 Grams) plus a calibration weight.

Tue, 08/28/2012 - 15:50 | 2744519 phyregold
phyregold's picture

10% above spot is the local dealers

Tue, 08/28/2012 - 16:18 | 2744551 malek
malek's picture

A coin dealer in my vicinity has currently $83 premium on Gold Eagles.

See if you can negotiate a lower markup, else find better ones or order somewhere online.

Tue, 08/28/2012 - 16:21 | 2744553 phyregold
phyregold's picture

I guess thats my question, what site online?

Tue, 08/28/2012 - 17:08 | 2744645 malek
malek's picture

I already mentioned Apmex and Tulving. I have used the former anumber of times, never had anything to complain about. Remember shipping can be up to $50 per order, and don't pay by credit card if you want low overall markups.

I think a good site to read on experiences, which seems not to be flooded by bots and paid scammers last time I looked, is

Tue, 08/28/2012 - 19:03 | 2744939 Citxmech
Citxmech's picture

Some others are Kitco and NorthWest Territorial Mint.

NWTM at least used to have a reputation for taking their time filling Au orders, but they've always been very good to me.

Tue, 08/28/2012 - 19:12 | 2744972 Papasmurf
Papasmurf's picture

eBay is an excellent place to buy gold plated bus tokens. 

Tue, 08/28/2012 - 15:40 | 2744485 Dr. Engali
Dr. Engali's picture


"Economies with less government intervention, such as the US, usually see NPLs peaking one or two quarters after growth troughs"


If this is an economy with less government intervention then I'd hate to see one that has more. Cripes the feds have their big noses in everything.

Tue, 08/28/2012 - 15:43 | 2744500 resurger
resurger's picture

NPL's usually lead's to bigger provisions which will sure hit the profitability, there is nothing you can do about that even if you QE to death.

Tue, 08/28/2012 - 17:14 | 2744658 malikai
malikai's picture

It's actually true. Consider SOE's like China Unicom, etc. Of course, the flipside is to throw subsidized business stateside in the SOE basket and you're probably level.

Tue, 08/28/2012 - 15:40 | 2744487 Bartanist
Bartanist's picture

So what? Just a couple of adjustments to the balance sheet and it is as if the money was never created and the debt was never owed. That is the miracle of fiat money. It went into the economy, expanding it, but it can be ignored when convenient.

Tue, 08/28/2012 - 15:43 | 2744496 ParkAveFlasher
ParkAveFlasher's picture

You no pay?  I no give you @#%* roan!

Tue, 08/28/2012 - 15:44 | 2744497 DormRoom
DormRoom's picture

A world awash in free & easy Central Bank money breaks down the price discovery mechanism, and will eventually transform the majority of productive asset classes, into non peforming ones, except for the necessary & sufficient asset: FLOW.

Tue, 08/28/2012 - 17:31 | 2744679 g speed
g speed's picture

bingo ----+tu

Tue, 08/28/2012 - 15:44 | 2744504 hardcleareye
hardcleareye's picture

8.3% Drop in Coal Mining Profits? 

Considering the cost per barrel of oil and most of China's electrical generation is dominated by coal, for these kinda of drops to occur electrical generation demand must have fallen off the cliff.

Or is there another way to look at this?

Tue, 08/28/2012 - 15:58 | 2744530 hardcleareye
hardcleareye's picture

This was an interesting insight into the situation, financing cost eating up profit margins...

Tue, 08/28/2012 - 15:46 | 2744507 resurger
resurger's picture

Israeli army cleared in Rachel Corrie death

Israeli court has ruled in a civil case that the Israel army was not at fault in the bulldozer death of American pro-Palestinian activist Rachel Corrie nearly 10 years ago.

Corrie was 23 years old when she went to the town of Rafah in the Gaza Strip as part of a group of activists from the International Solidarity Movement (ISM).

They were acting as human shields to try to stop the Israeli army demolishing Palestinian homes and clearing land around Rafah.

"I reached the conclusion that there was no negligence on the part of the bulldozer driver," Judge Oded Gershon said, reading out his verdict on Tuesday at the Haifa District Court in northern Israel.


Fuck the Israeli army, free Palestine.

Tue, 08/28/2012 - 17:09 | 2744647 LFMayor
LFMayor's picture

that was C H I N A.  not mideast.  And piss on that hippy bitch.  Especially her tool parents.  Progs just don't understand physics, even simple shit like the mass rule.  Objects with greater mass go where the fuck they want.  Like D9's.

Tue, 08/28/2012 - 18:03 | 2744748 bunnyswanson
bunnyswanson's picture


The atrocities taking place at the hands of Israeli soldiers is no secret.   The blood soaked soil in this region called the Holy Land is an affront to anyone who has a sense of right and wrong.  No man should have to bury his child.  But Israel....Israel will not stop until there isn't an Arab left alive, and then they'll come for the rest of us.

Tue, 08/28/2012 - 15:48 | 2744510 resurger
resurger's picture

Double Post due to lag

Tue, 08/28/2012 - 15:47 | 2744511 KidHorn
KidHorn's picture

Since these loans weren't likely securitized, it will be easy to cover them up. Expect the PBoC to have their own QE involving purchasing bad debts from banks. Not unlike our QE. Except it will be hush hush.

Tue, 08/28/2012 - 15:50 | 2744517 reader2010
reader2010's picture

Jim Rogers says China is Different and recommends BTFD!  Because RED IS GREEN in China.

Tue, 08/28/2012 - 15:51 | 2744520 MrBoompi
MrBoompi's picture

Maybe China can offshore some jobs to the only place in the world with cheaper labor rates...US prisons.



Tue, 08/28/2012 - 15:53 | 2744526 Iam_Silverman
Iam_Silverman's picture

Those banks can just increase the quality of their assets pledged as loan-loss reserves.  I think that it would be best if they purchased some really good quality U.S. Trasheries, er Treasury Notes to add some quality asset classes!

Hope that such an idea doesn't trigger a Hopium War when payup time rolls around!

Tue, 08/28/2012 - 16:15 | 2744545 azzhatter
azzhatter's picture

Rolin rollin rollin, keeps those loans a rollin rollin rollin

Tue, 08/28/2012 - 16:28 | 2744566 Bam_Man
Bam_Man's picture


Tue, 08/28/2012 - 16:37 | 2744576 Tombstone
Tombstone's picture

Central planning is the stupidest idea ever invented for running an economy.  If the commies in Washington can't get it right, do we think the commies in China will do any better? 

Tue, 08/28/2012 - 17:18 | 2744666 malikai
malikai's picture

Sorry, but the "Chinese Communist Party", is not communist at all. It is a centrally planning entity, but to call them communist is to not understand communism.

Tue, 08/28/2012 - 18:33 | 2744842 q99x2
q99x2's picture

I can see GS executives rubbing their greedy little rat hands together and bugging out their rodent eyes over this. Look out China you are about to get offered a deal too good to refuse.

Tue, 08/28/2012 - 21:43 | 2745390 DeFeralCat
DeFeralCat's picture

Don't mistake the isms for corruption. Whether it is capitalism, communism or socialism, at the end of the day, they are all corrupt. The problem in the global economy is corruption and fraud. It remains to be seen which of the isms actually work because quite frankly they are all taking it on the chin at the moment.

Tue, 08/28/2012 - 23:48 | 2745632 merizobeach
merizobeach's picture

It's an article about China... where is AnAnon's pukefest of illogic and nationalist propaganda?

Wed, 08/29/2012 - 00:02 | 2745658 strangewalk
strangewalk's picture

Some entity in China borrows money from a bank and can't repay, the bank forgives the loan, wipes it off the books, has the government send more money to make up for the loss. Then, the same outfit borrows more from the same bank and can't repay again, and the bank repeats the same procedure. Can't this go on FOREVER? What harm would it do? Most important, why can't I do this at my bank? 

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