Guest Post: Some Bubble Snapshots And Schizophrenic Five Year Plans

Submitted by JM

Some Bubble Snapshots and Schizophrenic Five Year Plans

All data comes from central bank websites and the IMF Statistical Bulletin.  I assume money from China is intertwined in the Hong Kong and Singapore financial complexes…

Support for this interconnection is seen in deposits (from Mainland) far in excess of Hong Kong and Singapore loans…

Are Mainland gains booked in Hong Kong deposits, while the Yuan is borrowed (shorted)?  Have a look at financial system loan growth.  Now even in a semi-centrally planned economy, the test of a true bubble is in loan growth (leverage).  Hong Kong and Singapore are flat, but China lending growth is astonishing.  Note also India.

Despite governments dictating more loan-loss provisioning, China (and Korea and India) has little capital to assets.  Loan growth and poor provisioning in China and India are giving off warning signs.

Now consider customer deposit growth.  Hong Kong and Singapore deposit growth is flat.  If I am right about the interconnection between booking gains in non-Yuan and borrowing in Yuan, this is a signal of Mainland deleveraging and liquidity needs.

Asset quality is the crux of a bubble.  Deteriorating asset quality creates balance sheet mismatches.  Just as investors “reach for yield”, the first banks in on low quality loans show strong returns, so the whole banking sector joins in.  Thus an imperfect indicator of declining asset quality is a high loans/total assets ratio.   Vulnerability happens when loans season and NPLs creep up.  Then banks need cash.  When they don’t provision for losses you get a meltdown. 

China, Korea, and India have extremely low capital provisioning for this contingency. 

The Korean consumer sector looks shaky, although corporate balance sheets are much stronger and contribute to the high deposits to GDP in the first chart.  A lot of Korean valuations are sky high and ready for a long drop. 

While the balance of loan growth, customer deposit growth, and capital to assets in India doesn’t look good, India is not as “financialized” to the same extent as the other countries.   Because of this, it is less susceptible to deleveraging fire-sales and also rides a long term trend of financial system growth.  Frankly, Indian risk started rolling over a while ago anyway. 

China deserves some attention.  Flare-ups in Chinese social tension are a function of inflation.  There are steps to it:

1)   uptick in commodities, a sign of inflation and inflation expectations
2)   higher final retail prices, pressuring producer margins
3)   rising housing prices and other illiquid assets

The Chinese central government plans to ease 3) by building more socialized housing.  In fact, the Chinese government goal is to have 18% of the 218 million urban households by 2015 in public housing.  It has committed to breaking ground on 10 million housing units in 2011-2012 alone, skewed to the following projects:  1.6 million units of low-rent housing, 2.2 million units of public rental, 4 million units of slum-area reconstruction, and 2.2 million units of “economic housing”.

Notice how silly this is.  Easing 1) and 2) requires curbing loan growth.  Building millions of housing units requires financing.  It will be hard to cool this economy down without a crash, because one hand is trying to undo what the other hand is trying to do.