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China's Debt Bubble

Discussion in 'China & Asia Pacific' started by Som Thomas, Aug 21, 2017.

  1. Som Thomas

    Som Thomas 2nd Lieutant FULL MEMBER

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    China’s debt surpasses 300 percent of GDP, IIF says, raising doubts over Yellen’s crisis remarks

    Global debt has hit a record level in the first quarter of this year, mainly driven by emerging markets, raising questions of whether there will be another financial crisis in the near future.

    Data from the Institute of International Finance showed that global debt reached $217 trillion in the first quarter of this year, or 327 percent of gross domestic product.

    "The debt burden is not distributed evenly. Some countries/sectors have seen deleveraging while others have built up very high debt levels. For the latter, rising debt may create headwinds for long-term growth and eventually pose risks for financial stability," the IIF said in its Global Debt Monitor report on Tuesday.

    Play Video

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    On Tuesday, U.S. Fed Chair Janet Yellen told an audience in London that banks are in a "very much stronger" position and another financial crisis is unlikely "in our lifetime."

    The 2008 financial crisis began with high indebtedness levels by U.S. households.

    But Yellen's remarks aren't' consensual.

    "I think Yellen's comment -- if I am interpreting it correctly -- is a huge hostage to fortune. The words Titanic and unsinkable spring to mind," Erik Jones, professor of international political economy at Johns Hopkins University, told CNBC via email.

    Casrten Brzeski, senior economist at ING said that "high debt levels mean that the debt crisis has not been solved, yet. Neither in the US, nor in the Eurozone. Increasing debt levels in Asia and other emerging market economies also show that a structural change has not yet taken place."

    "All of this, however, does not mean that we are at the verge of a other financial crisis. Central banks and low interest rates have and should continue to limit this risk significantly," he added via email.

    In the U.K., however, the Bank of Englandseems more cautious about the future. It instructed U.K. banks to raise their capital ratios as a precautionary step in the event of an economic slowdown. In its Financial Stability Report released Tuesday, the central bank noted that Brexit, high levels of indebtedness in China and an increase in consumer credit in the U.K. as potential risks.

    According to the IIF, despite the fact that debt levels have slowed down in mature economies, emerging market debt rose 5 percentage points from a year ago.

    "Total debt in emerging markets (excluding China) has increased by some $0.9 trillion to over $23.6 trillion in the first quarter of 2017—mainly driven by Brazil (up $0.6 trillion to $3.6 trillion) and India (up $0.2 trillion to 2.9 trillion)," the IFF said in its report.

    China poses a great risk in itself with households accelerating their borrowing.

    "The household debt-to-GDP ratio hit an all-time high of over 45 percent in the first quarter of 2017 —well above the Emerging Market average of around 35 percent. In addition, our estimates based on monthly data on total social financing suggest that China's total debt surpassed 304 percent of GDP as of May 2017," the IIF noted.

    On the other hand, there's been a steady decline in euro area private sector debt, from $103.4 trillion in the first quarter of 2016 to $97.7 trillion in the first quarter of this year.

    The IIF warned that there's over $1.9 trillion of emerging market bonds and syndicated loans maturing through to the end of 2017, with redemptions in USD making for about 15 percent of the total.


    https://www.cnbc.com/2017/06/28/chi...ising-doubts-over-yellens-crisis-remarks.html

    Well that's a good news.

    More coming in:
    https://www.bloomberg.com/news/arti...-up-as-china-s-debt-swaps-surpass-100-billion

    https://www.ft.com/content/3bc4da08-8171-11e7-a4ce-15b2513cb3ff
     
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  2. Golden_Rule

    Golden_Rule Lieutenant FULL MEMBER

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    304% at $11.2t is $34 trillion. Big Baloon!! ;)
     
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  3. Vyom

    Vyom Captain GEO STRATEGIC ANALYST

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    If that explodes my friend then we are all in trouble...
     
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  4. Agent_47

    Agent_47 Admin - Blog Staff Member MODERATOR

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    They can only delay the explosion, Its inevitable.

    $29 trillion worth of debt = $3 trillion forex reserve + $24 trillion of domestic savings in the banks. Over capacity, asset inflation, Still highly depended on export.
    This is a very shaky foundation. In one year almost a trillion dollar left china and reserve dropped that much. Now they imposed capital control.
    Next global economic crisis will be from china.

    I'm quoting Shivshankar Menon - http://indiandefence.com/threads/gl...oreign-policy-and-military.62924/#post-587757

    @kaku @PARIKRAMA @anant_s @Ankit Kumar 001 @randomradio @Rain Man @Levina
     
  5. Vyom

    Vyom Captain GEO STRATEGIC ANALYST

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    I have theory in mind, maybe I am wrong but the way I see it there is much wrong with China doing this stupidity. they can't be that dumb.. so it can be assumed they are doing it on purpose...
     
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  6. Agent_47

    Agent_47 Admin - Blog Staff Member MODERATOR

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    The debt fuel growth strategy is the direct outcome of 2008 financial crisis. They simply couldn't let the growth go down because rest of the world is experiencing it.
     
  7. sunstersun

    sunstersun Lieutenant FULL MEMBER

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    China isn't some enigma, yes they have had an unbelievable amount of economic growth in the past 30 years, but they still follow the same rules as everyone else.
     
  8. Vyom

    Vyom Captain GEO STRATEGIC ANALYST

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    or They are purposefully going kamikaze on the global economy, so that when the world is weakened it (CPC) can expand its (Political) foothold. They don't care about people or economy but only political power. We are not dealing with a nation state but a political ideology..
     
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  9. Vyom

    Vyom Captain GEO STRATEGIC ANALYST

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    China isn't an enigma ... CPC is... different rules as it is not a Nation State.
     
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  10. Bloom 17

    Bloom 17 2nd Lieutant FULL MEMBER

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    We will be the least effected compared to the rest of the world
     
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  11. Bloom 17

    Bloom 17 2nd Lieutant FULL MEMBER

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    Exactly! If their growth goes down so will CPC along with it. You will be seeing USSR 2.0
     
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  12. kaku

    kaku Major Technical Analyst

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    Yup I watched it.

    But if really suddenly cash wiped out from Chinese economy, CPC wont able to survive. Situation is Internal security budget is more than defence budget.

    That means CPC more afraid of Civil war instead of external war. The only way for China to survive is "radical" Political reforms. Otherwise sooner or later it dissolve like CCCP.
     
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  13. kaku

    kaku Major Technical Analyst

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    In August 2010, in an article in The South China Morning Post, John Garnaut asserted: "A Chinese two-star general has warned his conservative Communist Party masters and firebrand People's Liberation Army colleagues that China must either embrace US-style democracy or accept Soviet-style collapse."
    Lt General Liu Yazhou was then Political Commissar of the PLA's National Defense University. His declarations caused quite a stir in China.
    Ten months later, an article in the China Brief of the Jamestown Foundation speaks of the probable promotion of General Liu.
    Dr Zhang, an Associate Professor in the Department of Leadership and Strategy at the Air War College (USAF), in an article The Leadership of the PLAAF after 2012 said that General Lui "is inline as the next Political Commissar of the entire PLAAF."
    Dr. Zhang explained: "As one of the few PLA generals who have had Western experience, Liu spent one and half years at Stanford University as a visiting scholar in 1986 and 1987. He has written extensively about PLAAF strategy, having been recognized by many Chinese analysts as the 'Douhet of China' [Douhet was an Italian general, proponent of strategic bombing in aerial warfare] because of “his reputation as a daring forward thinker of air power theory” against the PLAAF’s traditional mindset."
    The China Defence Blog commented: "If Dr Zhang's prediction is correct, expect to see a different PLAAF five years from now under General Liu's new leadership."
    According to Dr Zhang: "As early as 2000, Lt General Liu Yazhou proposed that Chinese military authorities consider reorganizing the PLAAF into functional air commands by separating the air force from the PLA military region (MR) system to become a true independent service. Ostensibly to make the PLAAF a more offensively oriented air force, he further recommended the use of the U.S. Air Force’s “expeditionary force” model to organize air force units into air strike groups with a mix of fighters, bombers, and early warning aircraft. His advocacy for eliminating the ground force dominated military system, however, has received little support from the PLA military establishment."
    We have recently seen the limits of this theory in Libya, but the other issue is: what will happen to General Liu Yazhou's ideas about democracy, if he makes it to his new post? Will he try to implement them?
    Let us watch.

    China must reform or die
    JOHN GARNAUT
    August 12, 2010
    A Chinese two-star general has warned his conservative Communist Party masters and firebrand People's Liberation Army colleagues that China must either embrace US-style democracy or accept Soviet-style collapse.
    As officers of similar rank rattle their sabres against US aircraft carriers in the Yellow and South China seas, General Liu Yazhou says China's rise depends on adopting America's system of government rather than challenging its dominance off China's eastern coast.
    ''If a system fails to let its citizens breathe freely and release their creativity to the maximum extent, and fails to place those who best represent the system and its people into leadership positions, it is certain to perish,'' writes General Liu Yazhou in Hong Kong's Phoenix magazine, which is widely available on news stands and on the internet throughout China.
    The fact of General Liu's article suggests China's political and ideological struggles are more lively than commonly thought, ahead of a rotation of leaders in the Central Military Commission and then the Politburo in 2012.
    ''The secret of US success is neither Wall Street nor Silicon Valley, but its long-surviving rule of law and the system behind it,'' he says. ''The American system is said to be 'designed by genius and for the operation of the stupid'.
    ''A bad system makes a good person behave badly while a good system makes a bad person behave well. Democracy is the most urgent thing, without it there can be no sustainable rise.''
    General Liu was promoted recently from deputy political commissar of the PLA Air Force to political commissar of the National Defence University. His father was a senior military officer and his father-in-law was Li Xiannian, one of Chinese communism's ''Eight Immortals'' - and a one-time president of China.
    While many of China's ''princelings'' have exploited their revolutionary names to amass wealth and power, General Liu has exploited his pedigree to provide protection to push his contrarian and reformist views.
    But General Liu's latest writings are extraordinary by any standards. His article urges China to shift its strategic focus from the country's developed coastal areas, including Hong Kong and Taiwan - ''the renminbi belt'' - towards resource-rich Central Asia.
    But he argues that China will never have strategic reach by relying on wealth alone. ''A nation that is mindful only of the power of money is a backward and stupid nation,'' he writes. ''What we could believe in is the power of the truth.
    ''The truth is knowledge and knowledge is power.''
    But such national power can only come with political transformation. ''In the coming 10 years, a transformation from power politics to democracy will inevitably take place,'' he says.
    General Liu inverts the lesson that Chinese politicians have traditionally drawn from the collapse of the Soviet Union - that it was caused by too much political reform - by arguing that reform arrived too late.
    Since 2008 the Communist Party has steadily tightened the political screws to stifle dissent.
    Many Chinese are concerned that reforms have been blocked by powerful military, security, corporate and family groups that benefit from the status quo.
    General Liu was famously outspoken until he stopped publishing his essays about five years ago.
    It is unclear how his latest article appeared and whether he has backing within the system.
    Last year Hong Kong's Open magazine published a leaked report of one of General Liu's internal speeches which raised the taboo topic of how some generals refused to lead troops into Tiananmen Square in 1989.
    General Liu returned to the subject of Tiananmen in his Phoenix article, saying ''a nationwide riot'' was caused by the incompatibility of traditional power structures with reform.

    http://claudearpi.blogspot.in/2011/06/promotion-of-democracy.html
     
  14. sunstersun

    sunstersun Lieutenant FULL MEMBER

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    There's no way the CNC survives if the economy tanks. In a democracy you can vote for change or blame the other side, in a dictatorship when things go south you can only blame one entity.
     
  15. Agent_47

    Agent_47 Admin - Blog Staff Member MODERATOR

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    Analyst Lays Out China's "Doomsday" Scenario

    The first time we laid out the dire calculations about what is perhaps the biggest mystery inside China's financial system, namely the total amount of its non-performing loans, by former Fitch analyst Charlene Chu we called it a "neutron bomb" scenario, because unlike virtually every other rosy forecast the most dire of which topped out at around 8%, Chu argued that the amount of bad debt in China was no less than a whopping 21% of total loans.

    Corporate investigator Violet Ho never put a lot of faith in the bad loan numbers reported by China’s banks: crisscrossing provinces from Shandong to Xinjiang, she’s seen too much - from the shell game of moving assets between affiliated companies to disguise the true state of their finances to cover-ups by bankers loath to admit that loans they made won’t be recovered. The amount of bad debt piling up in China is at the center of a debate about whether the country will continue as a locomotive of global growth or sink into decades of stagnation like Japan after its credit bubble burst. Bank of China Ltd. reported on Thursday its biggest quarterly bad-loan provisions since going public in 2006.

    Charlene Chu, who made her name at Fitch Ratings making bearish assessments of the risks from China’s credit explosion since 2008, is among those crunching the numbers. While corporate investigator Ho relies on her observations from hitting the road, Chu and her colleagues at Autonomous Research in Hong Kong take a top-down approach. They estimate how much money is being wasted after the nation began getting smaller and smaller economic returns on its credit from 2008. Their assessment is informed by data from economies such as Japan that have gone though similar debt explosions.


    While traditional bank loans are not Chu’s prime focus -- she looks at the wider picture, including shadow banking -- she says her work suggests that nonperforming loans may be at 20 percent to 21 percent, or even higher.

    The chart below shows just how much of an outlier Chu's stark forecast was in comparison to her peers, and especially the grotesquely low and completely fabricated official number released by the banks and the government.

    [​IMG]

    To be sure, it has always been in Beijing's best interest to keep true NPL data well-hidden by everyone from the lowliest bank teller to the Politburo, who all know that merely the recognition of the problem would be sufficient to spark if not a full-blown panic then certainly accelerate capital outflows form the nation to an unstoppable degree.

    Another problem with making estimates of adequate collateral protection in China, one which makes such a venture more complicated than solving the proverbial riddle, wrapped in a mystery, inside an enigma, is that the very premise of collateralization in the world's most populous nation is nebulous. Recall that one of the biggest scandals in China in 2014 was the realization (as many had warned previously) that millions of tons of commodities were rehypothecated countless times, and thus "pledged" as collateral to numerous counterparties, and that as a result these same counterparties were unable to make sense of who owns what at one of China's largest ports, Qingdao. In this context, it is safe to assume that loss given default rates in China are if not 100% (or more, which is impossible in theoretical terms but in practice is quite possible, as another curious side effect of unlimited collateral rehypothecation), then as close to it as possible. In early June, Reuters published an expose on China's "Ghost Collateral" reminding China watchers that this most insidious phenomenon is anything but gone.

    Since then, fears about both China total debt load and the size of its NPLs have only grown, and most recently came under the spotlight of the IMF itself, which two days ago issued a warning about Beijing’s reluctance to rein in “dangerous” levels of debt, blaming Beijing’s tolerance of high debt levels on its goal of doubling the size of the economy between 2010 and 2020.

    “International experience suggests that China’s credit growth is on a dangerous trajectory, with increasing risks of a disruptive adjustment and/or a marked growth slowdown,” the IMF said. This statement is spot on, because as the IIF recently showed, total Chinese debt/GDP has now crossed above 300%, a level that in every historical instance, led to a financial crisis.

    [​IMG]

    What was left unsaid is that it is only because China doubled its total debt load following the financial crisis that the world managed to avoid succumbing to an unprecedented depression in the years following the financial crisis. However, by engaging on this unprecedented debt rampage, China only delayed the inevitable.

    The IMF tried to sound mutedly optimistic, adding that “the [Chinese] authorities will do what it takes to attain the 2020 GDP target,” however one look at the exponential rise in China's various credit product prompts substantial doubt how much longer Beijing can delay the inevitable.

    And then there is, of course, the biggest wildcard: how much of China's debt is already impaired, i.e., bad.

    * * *

    Fast forward to today, when Charlene Chu, described by the FT as "one of the most influential analysts of China’s financial system" is back with a revised estimate that the bad debt in China has now reached a stunning $6.8 trillion above official figures and warns that the government’s ability to enforce stability has allowed underlying problems to go unchecked.



    Charlene Chu built her reputation as China banking analyst at credit rating agency Fitch, where she was among the earliest to warn of risks from rising debt, especially in the country’s shadow banking system. Today many of her original views — such as concern about Chinese banks concealing risky credit in off balance sheet vehicles — have become consensus among analysts.

    The story repeated with grim determination by Charlene Chu, who left Fitch in 2014 to launch the Asia operation for Autonomous Research, is a familiar one: "everyone knows there’s a credit problem in China, but I find that people often forget about the scale. It’s important in global terms,” Chu told the FT in an interview.

    So if Chu held the wildly outlier view nearly two years ago that China's NPLs amount to 21% of total, what is her latest estimate? The number is a doozy: in her latest report, Chu estimates that bad debt in China’s financial system will reach as much as Rmb51 trillion , or $7.6 trillion, by the end of this year, more than five times the value of bank loans officially classified as either non-performing or one notch above." That estimate implies a bad-debt ratio of 34%, orders of magnitude above the official 5.3% ratio for those two categories at the end of June.

    Needless to say, there is a solid pushback against Chu's conclusion, and especially those who are currently invested in Chinese financial assets are doing everything in their power to prevent her opinion from becoming gospel.

    Chu is among the most bearish observers of China, and some analysts question her methodology. In particular, her estimate of Rmb51tn in bad debt is based on average credit losses across other 11 other economies that previously experienced rapid debt increases comparable to China, including Japan in 1985-97 and the US in 2000-07.

    But Chen Long, China economist at Gavekal Dragonomics in Beijing, said this methodology implicitly assumes that an economic crash will eventually occur in China.

    Mr Chen argues that credit losses are highly correlated with economic performance: bad loans rise when growth slows. If China can prevent a sharp downturn, credit losses will be much smaller, despite the extraordinary increase in leverage.

    Chen's conclusion is delightfully and perversely reflexive: as long as China can avoid a crash, it will avoid a crash: “If there’s an economic collapse, of course there will be massive credit losses. No one disagrees about that. But the issue is whether the collapse will actually happen. She takes that as a given,” he said, adding that Chu failed to consider examples such as Korea in the 2000s or Japan after 1997, when debt rose strongly without harming growth. Which is true, but what Chen forgot to note is that globalsince both of those examples has risen to never before seen levels, in the process making the recurrence of such one-time "success stories" impossible.

    [​IMG]

    Clearly Chen sees a far happier, non "crash landing" ending for the country with the 300% debt/GDP.

    As for Chu, she acknowledges that an acute crisis does not appear imminent as the government suffocating influence over both borrowers and lenders has allowed Beijing to delay problems much longer than would be possible in a more market-driven system. One factor that has foiled countless shorts over the years is that Beijing can simply order state-owned banks to keep lending to a lossmaking zombie company or to a smaller lender that relies on short-term interbank funding to stay liquid, and that's precisely what has been happening, when looking at the various non-conventional credit pathways in China in recent years, which include Wealth Management Products, Bank Loans to Non-Bank Institutions, Shadow Banking, Repos and Certificates of Deposit.

    [​IMG]

    But Chu said the ability to avoid recognizing losses only delays the inevitable day of reckoning as problems fester for longer, and grow larger than in an economy where actors respond purely to market incentives. That said, the recent spike in corporate bankruptcies indicates that even Beijing is slowly shifting to a more "market" driven stance.

    “What I’ve gotten a greater appreciation for is how everything is so orchestrated by the authorities,” she said. “The upside is that it creates stability. The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.”

    Finally, putting it all in context is the following chart showing the total size of China's financial sector, which as of the latest quarter has grown to $35 trillion, double the size of the US.

    [​IMG]

    If Chu is right, and local savers and investors certainly know best, it would explain why when looking at SAFE data showing "onshore FX settlement" and "cross-border RMB flows”, and which reveals that net flow of RMB from onshore to offshore was another $13.8billion in July , contrary to PBOC reports Chinese outflows have not ceasued since the summer of 2015...

    [​IMG]

    ... as a third of Chinese bank assets being "bad" would be nothing short of a "doomsday" scenario for China's financial system and also explains the relentless attempts by local to park their money offshore before the system one day "unexpectedly" crashes.

    http://www.zerohedge.com/news/2017-08-17/analyst-lays-out-chinas-doomsday-scenario
     
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