China Credit-Bubble Call Pits Fitch’s Chu Against S&P. May 29 (Bloomberg) -- Chinese banks are adding assets at the rate of an entire U.S. banking system in five years. To Charlene Chu of Fitch Ratings, that signals a crisis is brewing. Total lending from banks and other financial institutions in China was 198 percent of gross domestic product last year, compared with 125 percent four years earlier, according to calculations by Chu, the company’s Beijing-based head of China financial institutions. Fitch cut the nation’s long-term local-currency debt rating last month, in the first downgrade by one of the top three rating companies in 14 years. “There is just no way to grow out of a debt problem when credit is already twice as large as GDP and growing nearly twice as fast,” Chu, 41, said in an interview.
Chu’s view puts her in a minority among those charting the future of the world’s biggest nation. Her views have struck a nerve. Crisis Response Bad Loans Unreliable Data Total Credit Reliable Predictor Government Assets Urbanization, Currency. China’s Exploding Debt. By C.P. Chandrasekhar, Professor of Economics, School of Social Sciences, Jawaharlal Nehru University, New Delhi, India.
Cross posted from Triple Crisis If the international media are to be believed the world, still struggling with recession, is faced with a potential new threat emanating from China. Underlying that threat is a rapid rise in credit provided by a “shadow banking” sector to developers in an increasingly fragile property market. Efforts to address the property bubble or reduce fragility in the financial system can slow China’s growth substantially, aggravating global difficulties. The difficulty here is that the evidence is patchy and not always reliable. The problem is not merely the rapid rise in credit as a means to spurring investment and growth. Diversification away from bank lending as the main source of finance may be seen as a good thing. That confidence, as in China’s case, possibly comes from earlier rounds of robust real growth. China’s brokerages turn shadow banks. Feeding the Dragon: Why China’s Credit System Looks Vulnerable. The Chinese Credit Bubble - Full Frontal. Whereas it is relatively easy to track the progression of the "developed world" deep into the twilight rabbit zone hole (in bizarro metaphore-land speak) of no total debt/GDP return as defined by Reinhart and Rogoff (where anything above 80% sovereign leverage is more or less the game over line for one country, let along the entire Western world) courtesy of day to day updates of total debt in the US (103% debt/GDP) and its comparably indebted peers, when it comes to world's growth dynamo - China - it is next to impossible to get a sense of just how big the debt hole is for a country whose economic data has been and continues to be one massive goalseeked, G.I.G.O. blackbox.
At least that is the case at the sovereign level where the government can and does show whatever data it feels like as the country is excluded from traditional counterparty flow checks which serve as an at least modest buffer for data fabrication for the other globalized countries engaging in international trade. Mainland alchemists turn damaged zinc into solid gold. China has been telling the world not to worry about the bad debt of its banks. Central bankers reassure us the situation is manageable. Sceptical foreign investors can, perhaps, take some comfort from the wisdom and calmness of their mainland counterparts. The 3.5 billion yuan (HK$4.3 billion) loan default announced by the Metallurgical Corporation of China (MCC) is most telling. Its subsidiary defaulted on a one billion yuan loan and had guaranteed 90 per cent of a 2.5 billion yuan overdue loan of an associate, Huludao Zinc Industry (HZI). The bad news revealed in September pushed MCC's price down by 11.5 per cent.
Ironically, Shenzhen-listed HZI rose 6.78 per cent in the same period, outperforming the Shenzhen index. HZI trades at 2.54 yuan while MCC is only HK$1.46. Mainland investors aren't stupid; their optimism is bred from experience. HZI was born in financial distress. "HNMG has poor earning capacity. Despite that, state banks did not hesitate to lend to HNMG.
Everybody was happy. Will China’s bad debt problem affect employment? How much bad debt can China’s banks take? China’s Ticking Debt Bomb. China appeared to weather the global economic downturn better than most. But massive local government debt could bring growth to a screeching halt. China’s remarkable economic rebound after the global economic crisis in 2008-2009 has been a source of envy and puzzlement for the rest of the world. Instead of recession, the Chinese economy has recorded double-digit growth, and is actually showing signs of overheating – a sharp contrast with the stagnation in most Western countries. How did the Chinese do it? Perhaps advocates of ‘Chinese exceptionalism’ are right after all: Beijing has found a secret formula of economic success that has eluded the West. Part of the answer to this mystery was given in late June by the Chinese government. Based on the figure released by the National Audit Office (NAO) at the end of June, local governments have accumulated debts totalling 10.7 trillion renminbi (RMB) or $1.65 trillion – about 27 percent of China’s GDP in 2010.
Continued boom or epic bust? In a recent article, How China Ate America’s Lunch, Clif Carothers described what China has accomplished in the last thirty years: In thirty short years, China was able to accelerate her GDP from $216 billion to $6 trillion. She amassed reserve capital of $3 trillion. She reversed America’s fortunes from the greatest creditor nation to the greatest debtor nation.
She gutted America’s factories while creating the world’s largest manufacturing base in her own country. A measure of output that highly correlates to GDP is energy consumption. In June of this year, 2011, China surpassed the United States as the largest consumer of energy on the planet. While the U.S. consumes 19% of the world’s energy, China consumes 20.3%.
While China was growing their economy by a phenomenal 2,800%, the U.S. In a February 2010 Casey Report article titled Is China’s Recovery a Fraud? As with all monetary and fiscal stimuli, however, the initial high is always followed by a hangover. Inflated Dreams. UBS’s Magnus Warns of Risk of Chinese Minsky Moment. UBS strategist George Magnus helped popularize economist Hyman Minsky’s thinking in the runup to the financial crisis by warning of the likelihood of a “Minsky moment.” For those not familiar with Minsky’s work, a short overview from ECONNED: Hyman Minsky, an economist at Washington University, observed [that] periods of stability actually produce instability. Economic growth and low defaults lead to greater confidence and, with it, lax lending.In early stages of the economic cycle, thanks to fresh memories of tough times and defaults, lenders are stringent.
Most borrowers can pay interest and repay the loan balance (principal) when it comes due. But even in those times, some debtors are what Minsky calls “speculative units” who cannot repay principal. Over a protracted period of good times, capitalist economies tend to move to a financial structure in which there is a large weight of units engaged in speculative and Ponzi finance. What happens? Ouch. Chinese Ministry Saved from Default.