China banks under pressure as loans turn sour

[AgH20]

Could this be the Black Swan Event from China?

Below is an excerpt-the "Yes, minister" moment in this article is the quote "A bad debt isn't bad unless you insist on being repaid" from Patrick Chovanec associate professor of business at Tsinghua University, Beijing. :lol:

http://www.bbc.co.uk/news/business-19373895

As European and US banks have stumbled from bail-out to scandal in recent years, China's four biggest lenders have basked in the glow of unprecedented profit growth.

But the latest earnings reports from the country's banks, due by the end of August, are likely to show that the days of making easy money are numbered.

Economic growth in China this year is forecast to slide to its lowest since 1999, stoking fears of losses from bad loans as struggling companies and local governments delay or stop repayments.

Reported rates of non-performing loans (NPLs) are still low, running at around 1% of all bank loans, but the figure is expected to rise.

There are also concerns that banks are slow to categorise questionable loans and others go unreported, leading some analysts to conclude that a debt crisis looms.

"There was a huge explosion in lending over the past few years and so much money was going out so quickly...it's more than likely the credit quality went out the window," says Patrick Chovanec, an associate professor of business at Tsinghua University in Beijing.

And this bit makes for more interesting reading!

Mr Chovanec says many of the problem loans Chinese banks face stem from a state-directed lending spree in the wake of the global financial crisis in 2008.

The government leant on banks to lend more, particularly to local governments, which have used the cash for infrastructure projects intended to spur growth.

Last year, Beijing said that local governments had piled up 10.7tn yuan ($1.6tn) in debt, or the equivalent of 25% of China's annual economic output.

"Some were good investments and some were bad investments, but fundamentally they should have been paid with by tax revenue and they were not credible commercial loans," said Mr Chovanec.

'No Lehman'

Mr Chovanec is more downbeat about the banking system's prospects - although he doesn't expect a major Chinese bank to implode Lehman Brothers-style given the state's far-reaching role in the economy.

"A bad debt isn't bad unless you insist on being repaid," he says.

"The (Communist) Party can call up the head of one the big four banks and say 'look just don't collect on these loans' but that still has economic consequences," he says.

"The core banking system can sit on top of bad assets for a long time but that drags down economic growth."

Mr Chovanec says it is plausible that up to 20% or even 30% of banks' loan portfolios will turn bad.

This means the money Chinese banks are required to set aside - 2.5% of the loans they have extended - would not be enough to cover loan losses.

He also says that many smaller Chinese banks may not have enough liquidity to allow them to keep rolling over loans until the economy improves and customers can pay back what they owe.

"Banks were reporting huge profits because they were lending a great deal and one of the reasons why they are reporting lower profits now is because they are lending less," he says.

"But all of this disregards the credit quality and whether they are going to get paid back on those loans."

By Katie Hunt Business reporter, BBC News, Hong Kong

 

[Dogmatix]

"It's different there"

 

[GoldenEgg]

China just announced an 800billion USD stimulus.

 

[jpanggy]

China just announced an 800billion USD stimulus.

Source please, this is massive news. but heard nothing.

 

[rbaggio]

China just announced an 800billion USD stimulus.

Source please, this is massive news. but heard nothing.

http://www.telegraph.co.uk/finance/...unces-800bn-stimulus-to-boost-confidence.html

China announces 800bn stimulus to boost confidence
China has announced a total of 8 trillion yuan (800bn) of "stimulus projects" to try to boost confidence in an economy that appears to be cooling faster than expected.

 

[jpanggy]

China just announced an 800billion USD stimulus.

Source please, this is massive news. but heard nothing.

http://www.telegraph.co.uk/finance/...unces-800bn-stimulus-to-boost-confidence.html

China announces 800bn stimulus to boost confidence
China has announced a total of 8 trillion yuan (800bn) of "stimulus projects" to try to boost confidence in an economy that appears to be cooling faster than expected.

ok .... surprisingly little reaction from market.

 

[Dogmatix]

I thought the same.

I'm asking myself (and I guess SS members too) some questions, like:

- Does this mean PMs up or down? Does it mean inflation in other commodities? Me thinks silver might go berserk (gold not so much).

- If China spends $800B dollars or pounds or whatever extremely large converted currency figure it is, what exactly are they spending? Are they spending US Treasuries? Or just printed Yuan?

- If they're spending US Treasuries, then what? US hyperinflation?

- If they're spending printed Yuan, is this just to match the Fed's expected QE3, to maintain some kind of currency peg? Or just to match exhorbitant spending? Or does it mean out-of-control inflation in China?

- How do they think that spending such a large amount on stimulus will actually help their economy? Will they have much in the way of reserves left after this spending? Will any country actually have a freakin surplus anymore?

 

[bordsilver]

^^^ Surplus? Pfff a barbarous relic!

 

[Dogmatix]

Another thing to ponder - what would be the effect of China's stimulus on the USA?

Is it possible China will force the USA into QE3? Perhaps by driving up the costs of commodities (due to Chinese demand), increasing manufacturing supply (hurting manufacturing in other countries), etc?

Maybe this is their economic death stroke to the USD...

 

[jpanggy]

Another thing to ponder - what would be the effect of China's stimulus on the USA?

Is it possible China will force the USA into QE3? Perhaps by driving up the costs of commodities (due to Chinese demand), increasing manufacturing supply (hurting manufacturing in other countries), etc?

Maybe this is their economic death stroke to the USD...

China will force usa into qe3 if china devalues their currency too much.

I think in some article, china is controlling their currency devaluation in fear of retaliation (QE3) from usa.

 

[Dogmatix]

^ yes I agree, China is walking a currency devaluation tightrope...although they're doing the absolute minimum they can get away with.

I think they're supposed to be letting the yuan appreciate against the USD though.

Something else to think about though, is what will Chinese stimulus do for Australia? Some argue that Rudds stimulus did nothing and it was Chinese stimulus that did the most for Australia.

House prices to the moon? BHP to $100 a share? Many possibilities. Maybe AUD to the moon.

 

[jpanggy]

^ yes I agree, China is walking a currency devaluation tightrope...although they're doing the absolute minimum they can get away with.

I think they're supposed to be letting the yuan appreciate against the USD though.

Something else to think about though, is what will Chinese stimulus do for Australia? Some argue that Rudds stimulus did nothing and it was Chinese stimulus that did the most for Australia.

House prices to the moon? BHP to $100 a share? Many possibilities. Maybe AUD to the moon.

An immediate effect is boost in construction projects which will boost iron ore and coal prices.

However, since it has done nothing so far .... the situation is very dire.

 

[Dogmatix]

^ yes I agree, China is walking a currency devaluation tightrope...although they're doing the absolute minimum they can get away with.

I think they're supposed to be letting the yuan appreciate against the USD though.

Something else to think about though, is what will Chinese stimulus do for Australia? Some argue that Rudds stimulus did nothing and it was Chinese stimulus that did the most for Australia.

House prices to the moon? BHP to $100 a share? Many possibilities. Maybe AUD to the moon.

An immediate effect is boost in construction projects which will boost iron ore and coal prices.

However, since it has done nothing so far .... the situation is very dire.

Very true, they have waited too long I think.

Boosted construction will also mean wealth for some, and those people may want to invest that wealth, or holiday in Australia perhaps. There are a lot of flow-on effects.

(not that I agree with the premise of stimulus, but if it's coming it's coming)

 

[bordsilver]

I thought the same.

I'm asking myself (and I guess SS members too) some questions, like:

- Does this mean PMs up or down? Does it mean inflation in other commodities? Me thinks silver might go berserk (gold not so much).

- If China spends $800B dollars or pounds or whatever extremely large converted currency figure it is, what exactly are they spending? Are they spending US Treasuries? Or just printed Yuan?

- If they're spending US Treasuries, then what? US hyperinflation?

- If they're spending printed Yuan, is this just to match the Fed's expected QE3, to maintain some kind of currency peg? Or just to match exhorbitant spending? Or does it mean out-of-control inflation in China?

- How do they think that spending such a large amount on stimulus will actually help their economy? Will they have much in the way of reserves left after this spending? Will any country actually have a freakin surplus anymore?

With a centrally planned economy who the heck knows. Everything is a guess I think. My thinking is to attack these questions by looking at the real economy rather than the nominal economy. A very rough start is below. Hopefully others can flesh it out.

In terms of the real economy they have been producing ship-loads of cheap manufactured goods that they were largely exchanging for worthless US/EU/etc IOUs. IOUs that are now significantly harder for the average US/EU/etc citizen to swap for the Chinese goods. Does the US/EU/etc Govt's &/or financial institutions who can (sort-of) still produce new IOUs actually want the same ship-loads of things? I can't imagine that they do.

Hence the current stuff that is being produced needs to fundamentally shift to either:
(a) produce the same stuff but somehow pass it on internally to the Chinese citizens
(b) change substantially to produce what the current IOUs printers actually want (whatever that is)
(c) there's no doubt an (c) option as well (there should always be 3 options) but I can't think of it at the moment.

My first thoughts are that (b) is unsustainable and potentially unattainable.

Somehow moving to (a) will require a massive shift in who holds the economic and political power within China. Effectively they need to transition rapidly away from the centrally planned economy ideas to a real grass roots production structure meeting internal consumer desires/needs which can only happen by truly freeing up the ownership of capital. I'm fairly optimistic about the chance of this happening eventually but I really doubt this can happen quickly. China essentially needs a recession to wipe away all the malinvestments and misallocated resources to reset the economy and allow the next stage of growth to begin. As with all our Western socialist governments (including Australia), they don't want to let this happen.

Hence, option (c) is the only path available (whatever that is ).

 

[Dogmatix]

Ah, thy old 'consumption economie'.

We already talked about that

http://forums.silverstackers.com/message-381089.html#p381089

I found the Pettis article to be very convincing on the topic. I don't think China can do it. I think we'll look back on our "it's different there" comments (about China's red miracle economy) with as much shame as our "it's different here" comments regarding our own property bubble.

 

[bordsilver]

^^^ Thanks for reminding me. Due to my job almost everything in my brain is held in short-term RAM that gets dumped after a couple of weeks. So even though that thread was only a month ago I had forgotten about it.

Good to see that my thinking hasn't changed in the past few weeks

So, Option (c) is clearly the only way for them to be able to sustain their historic growth without experiencing a bout of the flu some time soon. In my mind, whether it will be a minor flu or a 1918 Spanish flu will depend on how much the current power brokers are willing to send the army against their own people so that they can maintain their wealth/status/etc.

 

[Big A.D.]

In terms of the real economy they have been producing ship-loads of cheap manufactured goods that they were largely exchanging for worthless US/EU/etc IOUs. IOUs that are now significantly harder for the average US/EU/etc citizen to swap for the Chinese goods. Does the US/EU/etc Govt's &/or financial institutions who can (sort-of) still produce new IOUs actually want the same ship-loads of things? I can't imagine that they do.

Hence the current stuff that is being produced needs to fundamentally shift to either:
(a) produce the same stuff but somehow pass it on internally to the Chinese citizens
(b) change substantially to produce what the current IOUs printers actually want (whatever that is)
(c) there's no doubt an (c) option as well (there should always be 3 options) but I can't think of it at the moment.

The rest of the world wants what China is making now, but for the same price with better quality (better long term value) or for the same quality at a cheaper price (because the West has devalued it's currencies and they can't buy as much stuff as they used to).

Doing either of those things is going to take time which China probably doesn't have before a slow-down occurs, so China has to work towards that in the long term but encourage domestic consumption in the short term to pick up the excess supply capacity they have.

One of the biggest problems they have is the Chinese domestic savings rate which (depending on the age bracket) is between 25% and 40% of earnings. Obviously they could drop interest rates, allow inflation to ramp up and "encourage" people to spend money before it's purchasing power gets eaten away but whenever things have gone that way in the past people have tended to get pretty pissed. Doing that tends to push money towards industrial sectors which means it gets sucked out of agriculture and food prices go up like a rocket. China still has a lot of poor people and lots of hungry poor people doesn't make for a harmonious, stable society.

One of the few things I can see that China could do, and probably do reasonably well is introduce a proper socialised health care system. They have a centralised, planned economy so they already have the mechanisms in place to create the administration that will just "make it so". Providing a "safety net" grade basic health care system would mean the people who are saving so much of their income in anticipation of paying for health care would have that much extra cash available for spending.

They certainly can't keep building empty cities.

 

[bordsilver]

In terms of the real economy they have been producing ship-loads of cheap manufactured goods that they were largely exchanging for worthless US/EU/etc IOUs. IOUs that are now significantly harder for the average US/EU/etc citizen to swap for the Chinese goods. Does the US/EU/etc Govt's &/or financial institutions who can (sort-of) still produce new IOUs actually want the same ship-loads of things? I can't imagine that they do.

Hence the current stuff that is being produced needs to fundamentally shift to either:
(a) produce the same stuff but somehow pass it on internally to the Chinese citizens
(b) change substantially to produce what the current IOUs printers actually want (whatever that is)
(c) there's no doubt an (c) option as well (there should always be 3 options) but I can't think of it at the moment.

The rest of the world wants what China is making now, but for the same price with better quality (better long term value) or for the same quality at a cheaper price (because the West has devalued it's currencies and they can't buy as much stuff as they used to).

Yep. What I said, but probably in a clearer way :lol:

Doing either of those things is going to take time which China probably doesn't have before a slow-down occurs, so China has to work towards that in the long term but encourage domestic consumption in the short term to pick up the excess supply capacity they have.

Yes. Time to change is needed and hence a "problem".

One of the biggest problems they have is the Chinese domestic savings rate which (depending on the age bracket) is between 25% and 40% of earnings. Obviously they could drop interest rates, allow inflation to ramp up and "encourage" people to spend money before it's purchasing power gets eaten away but whenever things have gone that way in the past people have tended to get pretty pissed. Doing that tends to push money towards industrial sectors which means it gets sucked out of agriculture and food prices go up like a rocket. China still has a lot of poor people and lots of hungry poor people doesn't make for a harmonious, stable society.

Disagree hugely. A high savings rate isn't a problem. Indeed it is one of the few freedoms left to the citizens. Deliberately creating inflation and manipulating interest rates IS what got them (and us) into much of the mess we are in. You don't make poor people rich by taking their savings away and giving it to the bankers or Govt bureaucrats. You do however, make them effective slaves for longer.

One of the few things I can see that China could do, and probably do reasonably well is introduce a proper socialised health care system. They have a centralised, planned economy so they already have the mechanisms in place to create the administration that will just "make it so". Providing a "safety net" grade basic health care system would mean the people who are saving so much of their income in anticipation of paying for health care would have that much extra cash available for spending.

They are already centrally planning too much. One of the potentially redeeming features of China that makes me hopeful that they can have real growth MkII in the future is that the people DON'T have the massive welfare system that has historically been part of the centrally planned economies. Hence, the people should hopefully naturally adjust to increased economic freedom faster. Besides, a Govt. run health scheme will just kick the savings can from the people to the Government.

They certainly can't keep building empty cities.

Agree (even though our terms of trade has been benefiting and will no doubt fall when they stop ).

 

[1for1]

Inflation in China = Onflation in the ROTW

In this WORLD Economy price inflationary effects are felt across borders... When Chinas COP increase and the costs are passed on to the end consumer, then we will start to pay extra for everything made in china.. oh wait.. that is everything!!

So yes stimulus in China = price inflation on all fast moving consumer goods will bounce up.. at what point will domestic demand in China fill the deamnd of US and Can, Aus, GB and NZ etc.. At what point will we stop being able to afford China imports.. when they dont have all these NEW taxes and costs and a brutal gcvernment at war with private companies trying to employ and make revenue to pay taxes!

haha.. there is no inflation *(they actually mean price inflation).. thats what they tell me on telly .. Dont you watch the news?

1for1

 

[Dogmatix]

^ I thought the same for a minute, but then I wonder, is China really able to pass on supply costs so easily?

They're internally competitive, and they're selling to depressed markets.