China's growth is supported by... credit?

[Tyler Durden]

This was a great article I found on SMH today and wanted to share and hopefully lead to some fruitful discussions on the merits of the article. Here's an extract:

China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.

The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.

...

Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term "Shibor" borrowing rates, a sign that liquidity has suddenly dried up.

"Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products," she said.

Fitch warned that wealth products worth $US2 trillion of lending are in reality a "hidden second balance sheet" for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25 per cent in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.

http://www.smh.com.au/business/china/chinas-credit-bubble-is-unprecedented-fitch-20130618-2ofkc.html

 

[sydboy007]

Wont be surprised if another huge bank bailout is required in the next few years.

The amount of bad debt being hidden by enforced rollovers is just huge.

Seems the world has short memories. Wans't much more than a decade ago when the Chinese banking industry was bankrupts and it took 40+B to recapitalise them - not even up to (pre) BASEL standards IIRC.

China has been wasting so much money on investment the last 5 years that I expect hundreds of billions to slow disappear as the property bubble deflates and the shadow banking system collapses under the weight of bad debts.

 

[FlyingFox]

The question is, does the government have enough powder left to do something about this when the proverbial s*!t hits the fan.

 

[sydboy007]

The question is, does the government have enough powder left to do something about this when the proverbial s*!t hits the fan.

AUD at 50c US will probably be the way we're saved again, in a similar way to the Asian financial crisis of yore

 

[FlyingFox]

AUD at 50c US will probably be the way we're saved again, in a similar way to the Asian financial crisis of yore

Perhaps. What about the Chinese government, that what I was trying to get at.

 

[CanOz]

No signs of any cracks here yet, but they widened the band some time ago as you can see. If things go pair shaped, we should be able to see this change.

CanOz

 

[sinner]

No signs of any cracks here yet, but they widened the band some time ago as you can see. If things go pair shaped, we should be able to see this change.

CanOz

I remember finding this article from 2011 verrrry interesting

http://www.zerohedge.com/news/intraday-usdcny-unchanged-2006

By breaking down the cumulative shift in USDCNY into intraday 'market/trading' movements (from fixing to close) and interday 'government-assisted' movements (from prior close to fixing), we can draw some perspective on what the market is trying to do and what the government is doing. Evidently from the chart, the outward appearance that CNY appreciation is slowly but surely occurring (the green line) is misleading, the clear signal is a market trading the USD higher (helped by European angst) and a PBoC massively intervening.

Great chart in the article.

I think the best writer on China by far is Michael Pettis, who actually lives there, check out his fantastic blog

www.mpettis.com

 

[Tyler Durden]

I found this article yesterday and thought it'd be relevant to this thread:

To Soros, the main risk facing the world is not the euro, the US Congress or a Japanese asset bubble but a Chinese debt disaster that is unfolding in plain sight. "There is an unresolved self-contradiction in China's current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years,'' he wrote.

Xi would be negligent to ignore Soros' warnings because he is hardly alone: Peking University professor Michael Pettis and Jim Chanos of Kynikos Associates have been beating this drum for years.

China would never admit to basing policy on outsiders' warnings. Still, it is interesting to see the flurry of official Chinese moves this week aimed at reining in the shadow banking sector. On Monday, for example, China's cabinet imposed new controls on the multitrillion-dollar sector, targeted off-the-books loans, and promised to tighten rule enforcement.

We need to call this industry what it really is: China's answer to Enron. Enron's real business was not energy and commodities but book-cooking. The same holds true for China's shadow-banking entities. They are the fuel Beijing uses ''to restart the furnaces'', without attracting the notice of Moody's, Standard & Poor's or the US Treasury Department.

''There are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008, but there is a significant difference,'' Soros wrote. ''In the US, financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises.

''How and when this contradiction will be resolved will have profound consequences for China and the world.''

http://www.smh.com.au/business/is-b...ros-betting-against-china-20140110-30mk8.html

 

[Clifton]

The one thing we learn from history is that we dont learn from history