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China: Massive Credit Bubble

Discussion in 'China & Asia Pacific' started by Rock n Rolla, Jun 18, 2013.

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  1. Rock n Rolla

    Rock n Rolla Lt. Colonel STAR MEMBER

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    China: Massive Credit Bubble Fueled By Shadow Banking And Securitization Could Collapse Banks

    The unprecedented level of credit expansion in China has gotten to the point where it dwarfs anything we’ve seen before with overall credit now at about $23 trillion, making a severe banking crisis a very real possibility.

    With a shadow banking system that is becoming increasingly prominent, the rise of bundling of assets and securitization, and an acceleration of policy tightening, over-indebted local governments and institutions will feel the pain of a rising cost of capital, prompting Fitch Ratings to raise red flags about the future growth prospects of the Chinese economy. At Nomura, where they noted that liquidity tightening is dangerous in a highly leveraged economy, they increased their probability that a risk scenario could push GDP growth below 7% this year, threatening social stability.

    China has been ominously out of the scene over the past several months, as the business and investing community has focused on the Federal Reserve and the European Union. Yet the world’s second largest economy could be on the verge of a dramatic financial sector meltdown that could jolt the globe.

    With a “credit-driven growth model [that] is clearly falling apart†and facing the specter of “Japanese-style deflation,†the risks have definitely increased, explained Fitch’s Charlene Chu, cited by The Telegraph’s Ambrose Evans-Pritchard.

    The Chinese financial sector is definitely sending out some dangerous signals. Overall credit has grown from $9 trillion to $23 trillion in the five years since Lehman, while the ratio of credit to GDP has surged 75 percentage points to about 200% in that time; this compares with an expansion of 40 percentage points in the five years to the implosion of the U.S. banking system in 2008, and about the same in the build up to Japan’s Nikkei bubble in 1990, Evans-Pritchard showed.

    A major problem is that much of this incredible surge in credit has been channeled through the shadow banking sector, which is very closely connected to the banks. Total non-loan credit hit $5.6 trillion in 2012, with nearly $2 trillion of that credit extended by opaque non-bank financial institutions, Fitch’s research shows. Furthermore, more than $2 trillion were connected to informal securitization of bank assets in so-called wealth management products (WMP).

    The share of new credit coming from “shadow channels†is rising, which suggests not only that more credit is going to weaker borrowers that can’t afford bank lending, but also that institutions with shoddy risk assessment and limited loss-absorption capacity are becoming increasingly relevant players; add the fact that three-fourths of shadow banking transactions are connected to banks and you have a recipe for disaster.

    Credit is now twice as large as GDP and growing twice as fast, Fitch noted, while the efficiency of said credit has collapsed: according to Evans-Pritchard, marginal GDP growth tied to each additional yuan lent has fallen from 0.85 to 0.15 over the past four years.

    At the same time, policy tightening has accelerated in May, leading to more difficult liquidity conditions, according to Nomura, which noted official total social financing has tumbled over the past two months. At the same time, short-term financing rates like the 7-day repo and the three-month Shanghai interbank rate have shot up in June. “We believe the series of policy tightening measures applied to the shadow banking sector in the past three months has reached a critical mass, such that deleveraging in the banking sector is happening,†they noted. More from Nomura:

    Premier Li Keqiang recently noted his satisfaction with the current rate of economic growth, while policymakers have been cracking down on what they see as financial excesses. This suggests the Chinese state won’t engage in policy easing any time soon, while the People’s Bank of China ’s (PBoC) inaction in the face of rising bank borrowing costs indicates little will to intervene markets. With a weak global economy and emerging markets suffering the Fed’s possible taper, there’s a 30% chance GDP growth in China may fall below 7% in the third or fourth quarter, Nomura’s team notes.

    The situation could be dramatically more dangerous if current risks materialize into a full blown financial crisis. Much like in the U.S., “stress will begin in the periphery and migrate to the core,†Fitch’s team said. Cracks have already emerged, as non-bank financial institutions have been under pressure as loan and trust defaults have increased.

    In the U.S., major banks like JPMorgan Chase JPM +1.36%, Goldman Sachs,
    Bank of America BAC +1.07%, and Citigroup
    C +0.28% were bailed out as the
    government forced all of them to take capital. In China, the government has the firepower to save its banking system, Fitch says. Banks have been forced to park more than $3 trillion in reserves in the PBoC, and the government is ready to unleash its firepower in the face of a crisis. But, “these factors mean a financial crisis isn’t inevitable, but they also enable an unhealthy situation to go on longer than it should, possibly resulting in an even larger problem down the road,†they added. At the same time, mid-tier banks that have engaged in substantial off-balance sheet activity and issuance of WMPs, have limited loss absorption capacity, and thin liquidity could definitely be on the hook, hurting their larger counterparts and the broader economy.

    China is the world’s second largest economy and one of the major holders of U.S. debt. It is also a regional power and one of the most important producer and consumer of goods and services. While it is unlikely that China will crash in the immediate-term, the factors that could result in a banking crisis are being set in motion.

    China: Massive Credit Bubble Fueled By Shadow Banking And Securitization Could Collapse Banks - Forbes
     
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  2. Anees

    Anees Lt. Colonel ELITE MEMBER

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    Chinese names Means FAKE .....:wave:
     
  3. Manmohan Yadav

    Manmohan Yadav Brigadier STAR MEMBER

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    waiting for, cause once it happens
    Japan, S.Korea, Vietnam, Philippines, Taiwan
    and above all India will stand to gain from it.
     
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  4. omya

    omya BANNED BANNED

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    if it happens
    failing state of commies will attack india ?
     
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  5. layman

    layman Aurignacian STAR MEMBER

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    Well, there is always war to bankroll them... AM sure they will chance it jus to get the people to rally around them.
     
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  6. Himanshu Pandey

    Himanshu Pandey Don't get mad, get even. STAR MEMBER

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    not on India.. because this war they can't support economically when they are falling and then there is danger of nukes.. if the war will remian the last option they will go for Taiwan... it has all the necessary ingredients which they needed... a small island with smaller forces.. long dispute and claim... no international acceptance of Taiwan as a nation in majority of nation( so it will be a intreagal war rather then attack on a nation technically), there is no danger of getting nuked and people of china will be united against taiwan to get their land back and make them a part of china rathen then just defeating India and gaining only few nuked cities(yes India will be nuked too but we are talking from chinise prospective).

    so first thy will not go to war, because the loyalty of a lot of chinise are not with CPC, so they will not risk using red army against some other nation when they will be needed to kill millions in china, 2nd if they go to war they will go for a nation against whom they can unite chinise with just few statements.. and this is easy for taiwan even Japan but it is protected by US Nukes so no japan rather then India. which is not directly connected with the life or past of chinise people in negative way... so India will not be the scapegoat.
     
  7. sangos

    sangos Lt. Colonel ELITE MEMBER

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    $23 trillion Bomb - :crazy:
     
  8. Rock n Rolla

    Rock n Rolla Lt. Colonel STAR MEMBER

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    Hope this massive ($23 trillion and counting) bubble bursts much sooner than Fitch Ratings' estimates. :dirol:
     
  9. Himanshu Pandey

    Himanshu Pandey Don't get mad, get even. STAR MEMBER

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    its so big that it will bust... they loaned 3 times of their economy... I am not good in economy but I think to repay the loan they have to return 3 tomes more money then they borrowed... means they have to pay 9 for every single worth of money...now I see no way in which they can pay it in next 20 years and we have to remind it that banks will not stop giving loan in all that time.. so it will be much more and its like putting a 9 time more price tag then the original value of a good... its a no escape situation to me.
     
  10. sunny

    sunny 2nd Lieutant FULL MEMBER

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    China centrol gov Credit is 9 trillion Yuan, local gov credit is 14 trillion Yuan, both about 23trillion Yuan; Government is the main role on borrow money and they can borrow easy;
    I don't believe 23 trillion $, 6.2 times than goverment credit???? Goverment revenue up 25% GDP, so it take part in 25% of all the things or even more, 23*4=92Trillion Yuan(14.6trillion $) is a reliable data, and banks have 22trillion $ bank savings,while US only government credit is 16.4trillion $
     
  11. Rock n Rolla

    Rock n Rolla Lt. Colonel STAR MEMBER

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    So you are saying Forbes/Fitch Ratings is lying :evilgrin:
     
  12. sunny

    sunny 2nd Lieutant FULL MEMBER

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    DID them not lying??? Even UN had been lying
     
  13. Rock n Rolla

    Rock n Rolla Lt. Colonel STAR MEMBER

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    OK!! I believe you...
     
  14. sunny

    sunny 2nd Lieutant FULL MEMBER

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    that is a unbelieve data, total credit is 6.3times of government credit?? If one tell that US credit will be 104trillion$, 6.3 times than US government credit, can you believe that?
     
  15. Rock n Rolla

    Rock n Rolla Lt. Colonel STAR MEMBER

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    OK, if Google's not censored there; just google $23 trillion credit bubble and you can see many major sources are reporting it as $23 trillion.

    The online version of China's Communist Party newspaper once hailed a report by The Onion naming North Korean dictator Kim Jong Un as the "Sexiest Man Alive" – apparently unaware it is satire.

    Chinese Newspaper Falls For 'Onion' Article Naming Kim Jong Un Sexiest Man Alive

    I am sure others verify & then publish. I rest my case!!
     
    Last edited: Jun 19, 2013
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