'Perhaps their complacency is justified.'
October 10, 2011 1:05 PM Subscribe
Special report: China's debt pileup raises risk of hard landing. 'When China announced a nearly $600 billion package to ward off the 2008 global financial crisis, city planners across the country happily embarked on a frenzy of infrastructure projects, some of them of arguable need.' 'Barclays Capital has predicted a global recession would trigger a "hard landing" in China, with gross domestic product sinking well below the 8 percent mark seen as the minimum for assuring enough job creation to keep up with urban migration. A severe economic slump would depress land sales, a vital source of funding for local governments, and make their debt load even more precarious.'
'Credit Suisse last week described the burgeoning growth of informal lending as a "time bomb" that posed a bigger risk to the Chinese economy than even the local government debt pileup.
Credit Suisse estimated the size of China's informal lending at up to 4 trillion yuan, equivalent to around 8 percent of above-board bank lending. Interest rates on these loans runs as high as 70 percent and they are expanding at an annual rate of about 50 percent.
The shadow bankers have lent 208 billion yuan to real estate developers so far this year, nearly as much as formal bank lending of 211 billion yuan. The risks, analysts say, is that even healthy developers become vulnerable to a liquidity crisis, given the short tenor and high rates of these loans.'
'Credit Suisse last week described the burgeoning growth of informal lending as a "time bomb" that posed a bigger risk to the Chinese economy than even the local government debt pileup.
Credit Suisse estimated the size of China's informal lending at up to 4 trillion yuan, equivalent to around 8 percent of above-board bank lending. Interest rates on these loans runs as high as 70 percent and they are expanding at an annual rate of about 50 percent.
The shadow bankers have lent 208 billion yuan to real estate developers so far this year, nearly as much as formal bank lending of 211 billion yuan. The risks, analysts say, is that even healthy developers become vulnerable to a liquidity crisis, given the short tenor and high rates of these loans.'
Patrick Chovanec had a similarly doom-laden prognosis last week: Economy on the Edge of a Nervous Breakdown. He mentions the disappearing capitalists of Wenzhou, which has been in the news here recently; they'd been utilising the shadow banking system but fled rather than repay what they'd borrowed. Victor Shih had spotted that household deposits may have been moving into that precarious shadow sector.
posted by Abiezer at 1:45 PM on October 10, 2011
posted by Abiezer at 1:45 PM on October 10, 2011
Its a house of cards. Terrible accounting standards. Lots of people made lots of bets in China without the due diligence they would have given for a deal in the US or Europe.
posted by Ironmouth at 1:48 PM on October 10, 2011 [1 favorite]
posted by Ironmouth at 1:48 PM on October 10, 2011 [1 favorite]
See also The Economist: Shorting China: Panda bears. Betting against China is in vogue.
One of the hazards of the contemporary financial age is how correlated the world's economy is. It used to be you could count on diversification by spreading money around different countries, or regions. Industries and asset types, too. But in the past 50 years assets have become much more correlated.
Paper accounting is one thing; when people start starving you get wars and revolutions.
posted by Nelson at 2:00 PM on October 10, 2011 [1 favorite]
One of the hazards of the contemporary financial age is how correlated the world's economy is. It used to be you could count on diversification by spreading money around different countries, or regions. Industries and asset types, too. But in the past 50 years assets have become much more correlated.
Paper accounting is one thing; when people start starving you get wars and revolutions.
posted by Nelson at 2:00 PM on October 10, 2011 [1 favorite]
Previously and previously
Yeah, I remember when Japan was going to buy the world (and the Saudis before them), and I have had a feeling for a while that, rather than being the Rulers of the 21st Century, China's economy might be one of the many rocks dragging the world economy down. Considering that China's history has been 2500 years of failed national economic experiments, this is not really a surprise. Except to investors, who always seem surprised when returns sometimes fail to increase.
posted by GenjiandProust at 2:11 PM on October 10, 2011
Yeah, I remember when Japan was going to buy the world (and the Saudis before them), and I have had a feeling for a while that, rather than being the Rulers of the 21st Century, China's economy might be one of the many rocks dragging the world economy down. Considering that China's history has been 2500 years of failed national economic experiments, this is not really a surprise. Except to investors, who always seem surprised when returns sometimes fail to increase.
posted by GenjiandProust at 2:11 PM on October 10, 2011
This is a very complicated topic with a shortage of reliable data and I could easily write a comment that's longer than the article. But to take just one example:
'The shadow bankers have lent 208 billion yuan to real estate developers so far this year, nearly as much as formal bank lending of 211 billion yuan. The risks, analysts say, is that even healthy developers become vulnerable to a liquidity crisis, given the short tenor and high rates of these loans.''
Informal finance is not lending vast amounts to developers because lending to real estate is out of control. It's lending because the official banking system (which is state-controlled) has been instructed to restrict credit to real estate because policymakers are (rightly) concerned about a real estate bubble.
Hence developers are desperate and borrowing from the greymarket. These 70% annual rates don't reflect long-term loans - they are short-term bridge finance - the developer hopes to keep ticking over until they can sell developments and get cash.
Many won't succeed. They will go bust. This is exactly what the state wants. Real estate development in China is highly fragmented - I think Vanke, which is the biggest developer, has a market share of 2% - and they would like the industry to consolidate (it's more easily controlled that way). Desperate real estate lenders scrambling for high-interest loans is what they want to see as evidence that policy is working.
At the same time, the government is trying to push low-income housing construction to a) keep real estate development (which is a key sector in the economy, especially for employment) going and b) reduce social tensions from people unable to afford the more expensive properties that developers have mostly concentrated on.
This should not sound excessively optimistic. China has a very dysfunctional financial system with a large number of hidden problems. I wouldn't go near Chinese banks as an investment (nor would I invest in the majority of other companies in China). But I think this article like most involving the Chinese economy looks at the wrong problems - or perhaps looks at the right problems from the wrong angle.
When your banks are state-owned, you control your own currency, the ownership of government and state-owned enterprise debt is largely domestic, you run a largely closed capital account and the options for most of the population to park their money elsewhere are limited, how it plays out is not quite how it has in the US bubble.
Working out what happens - and even more importantly when - is actually very hard. The part of the economy that's being squeezed is small private companies. State-owned firms and politically connected private companies don't have many liquidity issues at all - banks are happy to lend to them.
So do we see a shake-out in the private sector (especially real estate, but also more broadly) and yet more state influence of the economy? That's especially likely if the government steps up investment/spending that's not necessarily going to produce a high return but supports moderate growth and helps defuse unemployment issues, social issues, inequality etc.
That might not actually be good in the long run in terms of producing a more entrepreneurial and innovative economy. But equally it would mean that assuming that this produces an economic implosion - which is what the drift of that article is I think - doesn't pay out (at least this time round the cycle).
Simultaneously fascinating and a major headache to analyse ...
On preview, the Patrick Chovanec piece that Abiezer linked to is good for many of the nuances of this even if you don't agree with all his conclusions.
posted by Temagami at 2:27 PM on October 10, 2011 [13 favorites]
'The shadow bankers have lent 208 billion yuan to real estate developers so far this year, nearly as much as formal bank lending of 211 billion yuan. The risks, analysts say, is that even healthy developers become vulnerable to a liquidity crisis, given the short tenor and high rates of these loans.''
Informal finance is not lending vast amounts to developers because lending to real estate is out of control. It's lending because the official banking system (which is state-controlled) has been instructed to restrict credit to real estate because policymakers are (rightly) concerned about a real estate bubble.
Hence developers are desperate and borrowing from the greymarket. These 70% annual rates don't reflect long-term loans - they are short-term bridge finance - the developer hopes to keep ticking over until they can sell developments and get cash.
Many won't succeed. They will go bust. This is exactly what the state wants. Real estate development in China is highly fragmented - I think Vanke, which is the biggest developer, has a market share of 2% - and they would like the industry to consolidate (it's more easily controlled that way). Desperate real estate lenders scrambling for high-interest loans is what they want to see as evidence that policy is working.
At the same time, the government is trying to push low-income housing construction to a) keep real estate development (which is a key sector in the economy, especially for employment) going and b) reduce social tensions from people unable to afford the more expensive properties that developers have mostly concentrated on.
This should not sound excessively optimistic. China has a very dysfunctional financial system with a large number of hidden problems. I wouldn't go near Chinese banks as an investment (nor would I invest in the majority of other companies in China). But I think this article like most involving the Chinese economy looks at the wrong problems - or perhaps looks at the right problems from the wrong angle.
When your banks are state-owned, you control your own currency, the ownership of government and state-owned enterprise debt is largely domestic, you run a largely closed capital account and the options for most of the population to park their money elsewhere are limited, how it plays out is not quite how it has in the US bubble.
Working out what happens - and even more importantly when - is actually very hard. The part of the economy that's being squeezed is small private companies. State-owned firms and politically connected private companies don't have many liquidity issues at all - banks are happy to lend to them.
So do we see a shake-out in the private sector (especially real estate, but also more broadly) and yet more state influence of the economy? That's especially likely if the government steps up investment/spending that's not necessarily going to produce a high return but supports moderate growth and helps defuse unemployment issues, social issues, inequality etc.
That might not actually be good in the long run in terms of producing a more entrepreneurial and innovative economy. But equally it would mean that assuming that this produces an economic implosion - which is what the drift of that article is I think - doesn't pay out (at least this time round the cycle).
Simultaneously fascinating and a major headache to analyse ...
On preview, the Patrick Chovanec piece that Abiezer linked to is good for many of the nuances of this even if you don't agree with all his conclusions.
posted by Temagami at 2:27 PM on October 10, 2011 [13 favorites]
"Now, the probability of a hard-landing is getting even higher than before, in my view, the only question is when, not if."
posted by specialk420 at 3:03 PM on October 10, 2011
posted by specialk420 at 3:03 PM on October 10, 2011
I've been in Shanghai for the last two weeks, and noted to myself again and again the incredible numbers of huge public projects that seems to stand empty or under-utilized.
They build roads, public buildings, stadiums, tenement buildings, roads, lots of infrastructure, all super modern, and little used. It does look like a bubble.
All except the subway: they constructed the biggest underground systems in the world in less than 5 years, and it is a marvel: Efficient, fast, clean, hyper modern, cheap, safe and extremely well-used: 5.2 million commuters on an average day in a smooth seamless transfers. The trains come in every couple of seconds, it's a joy to see and use.
posted by growabrain at 5:36 PM on October 10, 2011 [1 favorite]
They build roads, public buildings, stadiums, tenement buildings, roads, lots of infrastructure, all super modern, and little used. It does look like a bubble.
All except the subway: they constructed the biggest underground systems in the world in less than 5 years, and it is a marvel: Efficient, fast, clean, hyper modern, cheap, safe and extremely well-used: 5.2 million commuters on an average day in a smooth seamless transfers. The trains come in every couple of seconds, it's a joy to see and use.
posted by growabrain at 5:36 PM on October 10, 2011 [1 favorite]
Chinese central govt wakes up every day with one big problem: how to employee millions of people. It does this by building public infrastructure, it takes a lot of people to build out a modern developed country. If anyone uses the infrastructure or not is secondary. The hope is that as China transitions into a consumer middle class society (from agrarian working class), the infrastructure will be available to make that happen more quickly. Generation A builds it, generation B uses it. This happened in the USA for example though more organically and not as fast (and we're at Generation C, who repair it).
posted by stbalbach at 7:10 PM on October 10, 2011 [1 favorite]
posted by stbalbach at 7:10 PM on October 10, 2011 [1 favorite]
China's bailing out its banks and stock market
http://www.zerohedge.com/news/credit-suisse-buries-chinas-banks
and has lots of hidden debt in local government. At this point, you've got to remember that China = size of america, population density of europe: a 'local government' or province is the size of the average pretty big country. The average town/small city is 1-2million people. That's the sort of little place the express train doesn't stop at.
http://www.golemxiv.co.uk/2011/10/china-10-7-trillion-yuan-of-debt-going-bad/
posted by maiamaia at 8:40 AM on October 12, 2011
http://www.zerohedge.com/news/credit-suisse-buries-chinas-banks
and has lots of hidden debt in local government. At this point, you've got to remember that China = size of america, population density of europe: a 'local government' or province is the size of the average pretty big country. The average town/small city is 1-2million people. That's the sort of little place the express train doesn't stop at.
http://www.golemxiv.co.uk/2011/10/china-10-7-trillion-yuan-of-debt-going-bad/
posted by maiamaia at 8:40 AM on October 12, 2011
The Chinese will bail out the banks. It will drag on growth but what else can they do, but hope for growth to bail out the Chinese.
posted by stbalbach at 11:51 AM on October 12, 2011
posted by stbalbach at 11:51 AM on October 12, 2011
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posted by amazingstill at 1:24 PM on October 10, 2011 [1 favorite]