Dismiss Notice
Welcome to IDF- Indian Defence Forum , register for free to join this friendly community of defence enthusiastic from around the world. Make your opinion heard and appreciated.

China: Massive Credit Bubble

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

Thread Status:
Not open for further replies.
  1. Manmohan Yadav

    Manmohan Yadav Brigadier STAR MEMBER

    Joined:
    Jul 1, 2011
    Messages:
    21,194
    Likes Received:
    5,707
    Country Flag:
    India
    why would they make a bad situation worse
    this isn't the India of 1960s

    I know there isn't,
    US system is not as secretive as Chinese
    that kind of money simply doesn't exist, its that simple
     
    Last edited: Jun 19, 2013
    3 people like this.
  2. layman

    layman Aurignacian STAR MEMBER

    Joined:
    May 1, 2012
    Messages:
    11,024
    Likes Received:
    3,033
    Country Flag:
    United States
    Chinese credits looks massive. But 40% of the credit is inherited from other countries. World will not allow this bubble to burst anytime soon, coz they need another viable creditor to bankroll other countries. If this bubble burst, first hit will be European nation and US. and we will be in the line. Since the next capable economy to bear the burden would be India. Because of it massive PPP. And Chinese are allowed to hold so much debt is because their population and their PPP. They can withstand mild to moderate economic downturn. Only draw back is Chinese people will be forced to buy everything local. Imports of foreign goods other than raw materials will be cut.

    With their population they can withstand, not a issue. Big issue would be can other countries sustain without crashing.
     
    1 person likes this.
  3. Rock n Rolla

    Rock n Rolla Lt. Colonel STAR MEMBER

    Joined:
    Apr 14, 2013
    Messages:
    5,900
    Likes Received:
    2,787
    China’s economy is freezing up. How freaked out should we be?

    [​IMG]

    Thursday was a very bad day for China’s economy, the world’s second-largest and a crucial pillar of the global economy, with credit markets freezing up in an unnerving parallel to the first days of the U.S. financial collapse. The question of how bad depends on whom you talk to, how much faith you have in Chinese leaders and, unfortunately, several factors that are largely unknowable. But we do know two things. First, Chinese leaders appear to be causing this problem deliberately, likely to try to avert a much worse problem. And, second, if this continues and even it works, it could see China’s economy finally cool after years of breakneck growth, with serious repercussions for the rest of us.

    Things got so bad that the Bank of China has been fighting rumors all day that it defaulted on its loans; if true, this would risk bank runs and more defaults, not unlike the first days of the U.S. financial collapse. There’s no indication that the rumors are true, and no one is running on China’s banks. But the fact that the trouble has even gotten to this point is a sign of how potentially serious this could be.

    Here’s what has happened: China’s credit market has been in a bubble for years, with too much lending and borrowing, similar to what happened in the United States during the financial crisis. All that lending helps grow the economy until, one day, the bubble bursts, and it all comes crashing down, as happened the United States. China’s economic growth has been slowing, making a similar a crisis more likely. Chinese leaders seem to be trying to prevent a disaster by basically popping the bubble, a kind of controlled mini-collapse meant to avoid The Big One.

    In a real, uncontrolled credit crisis like the U.S. financial meltdown, credit suddenly freezes up, particularly between banks, meaning that the daily loans banks were relying on to do business are suddenly no longer affordable. Banks with too many unsafe loans suddenly owe more money than they can get their hands on, sometimes leading them to default or even collapse. And that means that it suddenly becomes much tougher for everyone else – companies that want to build new factories, families that went to buy a home – to borrow money. That’s an uncontrolled credit crisis, and a number of China-watchers have been worried that China, in its pursuit of constant breakneck growth, could be headed for one.

    China’s central bank, which is likely to tamp down all that unsafe lending and over-borrowing before it leads to a crash, appears to have forced an artificial credit crisis. (It tested a more modest version just two weeks ago.) It looks like the People’s Bank of China has already tightened credit considerably, making it suddenly very difficult for banks to borrow money. Something called the seven-day bond repurchase rate, which indicates “liquidity” or the ease of borrowing money, shot way up to triple what it was two weeks ago.

    This pair of charts, from the economics site Zero Hedge, shows the eerie parallels between today’s freeze-up in the Chinese interbank lending market and what happened in the United States when Lehman Brothers collapsed, setting off a global crisis that we’re still recovering from:

    [​IMG]

    That second chart shows something called the TED spread, a key indicator of credit risk and how easy it is for U.S. banks to lend to one another.

    Money markets in China have also skyrocketed to what the Financial Times’ David Keohane called “silly levels.” This chart, via Keohane and Reuters’ Jamie McGeever, shows the money market rates way, way, way beyond any high of the last five years:

    [​IMG]
    China’s money market lending rates since 2008. (Source: Reuters’ Jamie McGeever)

    Here’s where things get a little confusing. Bloomberg News reported Thursday evening Beijing time that, as panic moved through the Chinese financial system, the country’s central bank stepped in and offered $8.2 billion in “relief” to the Industrial and Commercial Bank of China, which just happens to be both state-owned and the largest bank in the world. What does this mean? Maybe that Chinese leaders got cold feet and are trying to walk back the self-imposed crunch, maybe that China’s largest bank managed to negotiate some preferential treatment, maybe that leaders are worried their most important bank might actually be less healthy than they thought and want to protect it from default. Or maybe this is just part of the process of easing down the markets. But then the Chinese Web portal Sina announced that the reports were false (thanks to Bill Bishop for this link), adding some unnecessary confusion and uncertainty to an already volatile situation.

    So what happens next? There are four categories of outcome. The first is that Chinese leaders back off on the credit crunch and nothing happens, in which case they’ll probably just try the strategy again later. The second is that they press on and it works miraculously, cleaning out the financial system without causing too much pain. The third is that this spirals out of control, maybe because Beijing underestimated the risk or acted too late, potentially sending the global economy lurching once more. The fourth, and probably most likely, is that this works but is painful, averting catastrophe but slowing the Chinese economy after 20 years of miraculous growth.

    China-watchers, who tend to vary widely in their assessments of the country’s economic health, seem to be converging on that fourth scenario, of a painful but necessary slowdown. Nomura, a Japanese investment bank, recently issued a note (via the Financial Times) addressing fears that China could face a financial collapse. Their less-than-comforting caveat: “This is a tricky issue, as the definition of ‘financial crisis’ can differ among investors.” The bank predict that China will not slip into a full-on crisis, citing Beijing’s control over the financial system and unwillingness to let it go under. But the Japanese bank warned: “Nonetheless, we expect a painful deleveraging process in the next few months. Some defaults will likely occur in the manufacturing industry and in non-bank financial institutions.”

    If that happens, China’s growth would slow even more. HSBC just cut their prediction for Chinese GDP growth rate from 8.4 percent in 2014 to 7.4 percent, still high but a major drop that could plunge farther. This would be difficult for China, which has built its economy – and political stability – on keeping high economic growth. Recall that the U.S. financial collapse was disastrous for America’s already unhealthy economic sectors: city budgets, real estate, news media. Something similar could happen in China, which is also facing a massive property bubble. All of this could also be dire for the rest of the world, which is heavily linked to China’s economy and is still struggling to recover from the U.S. and European crises. Japan could be particularly vulnerable.

    But believe it or not, if all of this occurs, it might actually be good news. It could well avert a much more serious, uncontrolled Chinese financial collapse. The nation’s central bank has been successful in controlling market shocks like this, throwing around lots of money when it needs to. Officials seem to know what they’re doing; an experienced China-watcher I talked to called it “one step back, two steps forward.”

    Still, we’ve got to step back before we can step forward, and the time between steps could be tough on a global economy that doesn’t need any more strain.

    China?s economy is freezing up. How freaked out should we be?
     
  4. Rock n Rolla

    Rock n Rolla Lt. Colonel STAR MEMBER

    Joined:
    Apr 14, 2013
    Messages:
    5,900
    Likes Received:
    2,787
    Another China central bank worry; companies push into lending

    Chinese companies are getting more creative in the business of money lending as they struggle to keep profits ticking over in a cooling economy, raising concerns they are adding to the mountain of debt risks building in the world's No.2 economy.

    Big state companies in industries struggling with over-capacity but with easy access to credit are borrowing funds, not to invest in their business but to lend to smaller firms sometimes at several times the official interest rate, part of an informal lending market in China that authorities are taking aim at.

    China's central bank increased pressure on banks to rein in such informal lending and speculative trading last week in money markets, letting short-term interest rates spike to extraordinary levels.

    In the $3.7 trillion so-called shadow banking market, the fastest growing area is in so-called entrusted loans, which are arranged by banks on the companies' behalf, and in bankers' acceptance notes, tradable securities that give a steady flow of cash.

    Issuance of entrusted loans and bankers' acceptance notes has more than doubled to 1.6 trillion yuan ($261 billion) in the first four months of this year from 636 billion yuan a year ago.

    "Can we use the money to expand production? Definitely not," said a deputy general manager at a state-owned steel firm in the eastern Shandong province, speaking on condition of anonymity.

    "We will lose more if we produce more. We can only rely on other channels," he added, noting the firm loses an average 100-200 yuan per metric ton (1.1023 tons) of steel sold.

    China's economic growth is widely expected to slow further in the current quarter as exporters struggle with weak global markets, making lending money an increasingly attractive business option.

    But there are concerns that some of the money is going into areas the government would rather it did not, for example real estate speculation, raising the risk of it turning bad while not helping the economy out of its current slowdown.

    Indeed, debt is shaping up to be China's biggest financial problem. The cabinet has said it would control the flow of new money into industries struggling with overcapacity.

    Beijing worries the shadow banking market is creating asset-price bubbles, and the central bank has tried to put a barrier in the way of it in recent weeks by declining to inject major funds into money markets.

    The shadow banking system has arisen because main stream banking is focused on the needs of big state-owned enterprises.

    Ratings agency S&P has estimated that outstanding shadow banking credit totaled $3.7 trillion by the end of 2012, equal to 44 percent of GDP.

    Fitch has put it at about 60 percent, saying "torrid growth" has made the total of all forms of credit, including regular lending, shadow and hidden underground lending, as much as 200 percent of GDP.

    "This is a very, very big problem for the economy," said Wei Yao, China economist at Societe Generale in Hong Kong.

    "The existence of all these arbitrage efforts shows that in the real economy, there are few opportunities. You've limited all the opportunities for real growth, then you open a window in the financial markets; of course everyone goes there!"

    NEW TECHNIQUES

    With entrusted loans, a company provides the funds but, to circumvent a ban on direct lending to other firms, it designates a commercial bank to lend the money to a specific borrower.

    The lender stipulates the amount, tenor, and rate of the loan, while the banks earn fees from both sides without the loans showing up on their balance sheets.

    The average monthly amount of new entrusted loans was 179 billion yuan in the first four months of 2013, up from an average of 106 billion yuan a month last year.

    The steel company manager said he borrows from banks around the 6 percent official rate, then issues an entrusted loan to a borrower at up to twice that rate.

    The general manager of a local government-controlled glass company in the northern province of Hebei said his company has increased the use of such practices as business slowed, lending about 30 to 40 million yuan so far this year at around 6 to 7 percent mainly to related firms.

    Some private companies are also cashing in. Zhejiang Longsheng Group Co Ltd, a specialty chemicals maker based near Shanghai, detailed 50 entrusted loans worth 3 billion yuan outstanding in its 2012 annual report.

    The company lent to subsidiaries at rates of 6 to 7 percent, but unrelated companies were charged as much as 25 percent. It said one of the loans, with a rate of 20 percent, would be rolled over as the borrower had difficulty repaying it.

    Companies are also buying bank acceptance notes, transferable bills issued by other banks that can be sold for cash. These companies sell the bills and use part of the cash raised to make loans and the rest to buy more bills, thus ensuring a continuous churn of funds and income.

    The average monthly amount of bank acceptance bills issued so far this year has more than doubled to 222.8 billion yuan compared with an average of 87.5 billion yuan for all of 2012.

    REAL ESTATE A WORRY

    A chief worry is that the newly generated money is finding its way into speculative real estate, complicating China's three-year fight against a property bubble. New home prices in May rose from a year earlier at their fastest pace in more than two years.

    An official at the statistics department of the central bank's Dalian office, who asked not to be identified, said that among all the entrusted loans issued in 2012 in the northeastern city, about 30 percent went to the real estate sector at an average interest rate of 12 percent.

    Another official at the central bank's Chongqing office said finance companies and credit guarantee firms affiliated to state-owned enterprises are major issuers of such loans.

    "In our city, there is an estimated 50 percent or more of such loans flowing into the property sector and local government financing vehicles," said the official. "The injection of entrusted loans partially helps pull down the bad loan ratio in the property sector and local financing firms, but the risks keep brewing there and could become acute if the economy slows further."

    Analysis: Another China central bank worry; companies push into lending | Reuters
     
    Last edited: Jun 24, 2013
  5. Rock n Rolla

    Rock n Rolla Lt. Colonel STAR MEMBER

    Joined:
    Apr 14, 2013
    Messages:
    5,900
    Likes Received:
    2,787
    Cash crunch? China's true crunch time is yet to come

    How can a largely state-owned banking system experience a credit crunch? When the central bank decides to rein back credit.

    The Chinese central bank has been reining back credit for some time now as it has sought to control housing prices. But, when the cheap money from the rest of the world began reversing (Great Reversal part II) due to the Fed signalling an end date for the era of cheap money, funds leaving emerging economies like China have made the situation more apparent.

    Last week, the overnight lending rate between banks jumped to exceed 25% as banks became reluctant to lend to each other. But the lending rates fell again when the state-owned banks fell into line and resumed lending to each other.

    Now, the Chinese central bank says that liquidity is "ample" and essentially indicated that it will not inject more cash, holding firm on the line of controlling credit growth in the economy.

    As a result, the Chinese stock market fell into bear market territory led by the decline of banks. In other words, banks can't count on the central bank for cheap cash. In fact, the central bank wants to root out the poorly performing banks - especially those in the so-called shadow banking system.

    Unintended consequence

    Shadow banks in China, as I have said before, are not like Western shadow banks. They share the similarity of being worryingly outside the formal regulatory framework, but they aren't complex entities trading complicated financial instruments like derivatives. They carry out normal banking activities, namely lending, but without a banking license.

    The growth of this sector was almost an unintended consequence of the partial liberalisation of interest rates in 2004. In other words, China doesn't have one market-clearing interest rate, but controlled benchmark rates that set the cost for lending and deposits.

    They have been aiming to reform capital markets to better price for risk. And like many Chinese reforms, they did it gradually and partially. Unfortunately, in financial markets, they ended up bolstering informal lending that is the new frontier in concerns over the Chinese banking sector.

    China lifted the "ceiling" on the lending rate and the "floor" of the deposit rate in 2004. At present, there is still a "floor" on the lending rate of 6% and a "ceiling" on the deposit rate of 3%, although banks can now exceed the limits of both these benchmark rates by some 10%-30%.

    With the ability to earn higher returns through lending, unlicensed banks started doing so at reportedly double-digit rates. Funds even came from savers seeking better returns for their money. This is because, after inflation, the interest earned on deposits was sometimes negative in the post-global crisis period.

    Off balance sheet

    When coupled with few other avenues to put their money, there was unsurprisingly rapid growth in the informal lending sector.

    That isn't the only reason for the growth of the shadow banking system.

    Local governments have used off balance sheet vehicles to borrow from state-owned banks, especially since they were at the forefront of the government's large-scale stimulus measures to cope with the 2008 global financial crisis. Part of the problem is that China's municipal bond market is under-developed, so local governments can't simply borrow from debt markets and end up relying somewhat covertly on banks.

    The Chinese government is trying to curb this behaviour and have also started to allow local governments to issue bonds more independently to reduce the incentives to rely on banks.

    The result is that debt has grown quickly in China since the global financial crisis when they unleashed a large amount of credit to help stimulate their economy.

    [​IMG]
    How national debt levels have changed

    The central banks' central bank, the Bank for International Settlements (BIS), in its latest annual report, reveals that the growth of debt in China since 2007 is an astounding 50 percentage points of GDP.

    Comparatively, it is the fifth largest increase in debt among major economies, after only the rescued countries of Ireland, Portugal, and Greece, as well as Britain (that had a banking crisis and rescued its banks).

    Also, unlike those countries where the growth in debt is from government borrowing, most of China's increase in debt is due to companies borrowing. And thus China's concerns over too much lending, including from the shadow banking system. Local government borrowing is largely off balance sheet, so it doesn't show up necessarily in government debt levels.

    This growth in debt in a shaky banking system is why China's central bank is holding a firm line on injecting more cash into the system. The real crunch time is likely to come if the Chinese economy slows below the government's 7.5% target, and there is pressure to raise growth through easing the terms for lending. That is when the resolve of the central bank will truly be tested.

    Cash crunch? China's true crunch time is yet to come

    BBC News - Cash crunch? China's true crunch time is yet to come
     
  6. Manmohan Yadav

    Manmohan Yadav Brigadier STAR MEMBER

    Joined:
    Jul 1, 2011
    Messages:
    21,194
    Likes Received:
    5,707
    Country Flag:
    India
    Thread made sticky
     
  7. Rock n Rolla

    Rock n Rolla Lt. Colonel STAR MEMBER

    Joined:
    Apr 14, 2013
    Messages:
    5,900
    Likes Received:
    2,787
    Thanks [MENTION=6916]Manmohan Yadav[/MENTION]'ji

    Seems China's going to have more issues in the near future itself.
     
  8. Manmohan Yadav

    Manmohan Yadav Brigadier STAR MEMBER

    Joined:
    Jul 1, 2011
    Messages:
    21,194
    Likes Received:
    5,707
    Country Flag:
    India
    yup thats why
     
    1 person likes this.
  9. MiG-23MLD

    MiG-23MLD Major SENIOR MEMBER

    Joined:
    Jan 18, 2011
    Messages:
    3,873
    Likes Received:
    1,453
    China's 2014 growth target will be 7.5%, which is the same as last year, but military spending will be 12.2% up.

    The leadership of China announced its goals for 2014 at the opening of the annual session of its Parliament, The National People's Congress.

    The Beijing meeting gathers 3 000 legislators from across China every year and sets the country's top priorities for the course of the next 12 months.

    The announcement that China will keep current GDP growth rate is expected to draw criticism as the new leadership, which came to power in March 2013, had asserted it would hold up its GDP growth to address its environmental, social and economic issues.

    Acknowledging his country has many problems people are unhappy about, Chinese Premier Li Keqiang spoke of "painful structural adjustments" that are needed in the country and declared "war on pollution, corruption and terrorism", as the BBC quotes him as saying.

    Although growth rate is planned to be maintained by the export-driven industry, attempts will be made at boosting domestic consumption while at the same time keeping inflation at about 3.5%.

    The new military budget is USD 131.57 B, with the 12.2% increase mostly caused by a plan to develop more high-tech weapons and to strengthen coastal and air defenses, as Al Jazeera English reports.

    Li Keqiang also explained that research on national defense will also be boosted, and a modernization of Chinese armed forces will be conducted according to the needs of the information age.

    China, which has the world's second-largest defense budget, has announced double-digit increases to it for years on the grounds it is still much smaller than that of US (in 2013, Beijing put aside USD 112.2 B, whilst the US spent USD 600 B).

    Defense spending increase was declared amid tensions between China and Japan over a group of islands which are claimed by both countries and which occasionally raise fears of a conflict in the East China Sea.

    Chinese officials have also repeatedly declared they have sovereignty over 90% of the South China Sea, which, like waters around the controversial archipelago, are believed to hold significant oil and gas reserves. China's claim, however, has been contested for years by The Philippines, Vietnam, Malaysia, Brunei and Taiwan.

    - See more at: http://www.novinite.com/articles/15...Doubles+Defense+Spending#sthash.JnQ8VxdF.dpuf
     
  10. Averageamerican

    Averageamerican Colonel ELITE MEMBER

    Joined:
    Oct 3, 2010
    Messages:
    15,000
    Likes Received:
    2,255
    Country Flag:
    United States
Thread Status:
Not open for further replies.

Share This Page