Long time readers may remember some stories I wrote in 2009 as the Chinese 'economic miracle' took place. In February 2009 I asked if the Chinese simply were repeating the Alan Greenspan gameplan:[Feb 16 2009: Is China Pulling an Alan Greenspan?]
Some very interesting data out of China of late in terms of loan growth - in fact staggering data. Before I write the rest of this entry don't take it as bashing the Chinese. In fact they are learning from the masters of manipulation - the United States. They are following the Greenspan playbook - to forestall a normal economic cycle flood the system with dollars... which creates new bubbles. But now we see China is embarking on the same game plan - which in the long run will lead to bad outcomes, but in the short(er) run can goose values.
Chinese banks extended a record 1.62 trillion yuan ($237 billion) in loans in January, more than double the year before, as lenders heeded government calls to loosen credit controls to help revive the economy. Facing an abrupt slowdown due to plunging demand for China's exports, regulators have sought to boost liquidity after years of trying to rein in lending. Banks made 771.8 billion yuan ($113 billion) in new loans in December, figures show, up nearly 15 fold over the same month a year before.
Just as in the U.S., China has been applauded (as Greenspan once was, and Bernanke has been the past few years) for somehow bending the shape of the economic cycle. Of course the actions of all these folk, just create mis-allocations of capital as too much money chases too few assets. This has happened in the U.S. as well as the 'real economy' does not need all the liquidity the Fed has pushed into the system - already the price is being paid by the lower and middle class via commodity inflation, but there will be many other bad outcomes down the road (i.e. "stupid deals" are once more being made in credit markets - as if we are right back to 2006/2007).
But let's focus back on China. Unlike the U.S. the central command type economy made it much easier to push out this enormous loan growth straight into the economy. Some of the money certainly went to good causes.... others? Well that's why you tend to build empty cities. [Mar 29, 2011: [Video] An in depth Look at China's Empty Cities].
A few months after that February piece I wrote another [May 27, 2009: How is China Spending their Stimulus... and How Many Loans Will go Bad?]
They seem to be in a "build it, build anything" mode with loans flying out the wazoo to combat a slump in both exports and imports .......while no one seems to care except me, I am curious how many of these loans will go bad. Because as the US so aptly showed - when you make money easy, and banks lend to anything that moves ... well let's just say there is some fallout to that.
....let me say even if many bad things happen down the road from the actions of today - it really does not matter to "the market". "The market" is only concerned about finding a short term speculative profit in the near term, so it is clapping with both hands (and feet) for money to be thrown in every direction to create new bubbles. No matter the ultimate outcome
Certainly these things take a while to play out. And probably longer in a country as opaque as China, but we are now only 2 years down the road from when I wrote those pieces, and it looks like the fallout is beginning. Two stories in Bloomberg & Reuters the past 24 hours point this out. First we hear the Chinese "federal" level of government may soon be assuming local government debt. This is the equivalent of Washington D.C. taking on the debt of your local city, county, or state. Now of course, China runs massive surplus rather than deficit at the "federal" level so at least they are not borrowing money to pay off bad debts, but this is still a ponzi effectively - do stupid things at the local level, with the heaps of loans a few years ago - and than have the government absorb the losses. It sounds a lot like 2007 in the USA mortgage market - but don't worry, I'm sure "subprime is contained" in China.
- China plans to shift as much as 3 trillion yuan ($463 billion) of debt off of local governments, reducing the possibility of defaults that could threaten stability, Reuters reported, citing unidentified people. The central government will pay off some local debt and make state-owned banks write off some bad loans.
- Chinese cities and provinces, also currently barred from directly taking bank loans, have set up about 8,800 companies to fund infrastructure projects, Credit Suisse Group AG estimates. Fitch Ratings cited the risk from these vehicles, used to fund stimulus spending from the 2008 global financial crisis, in lowering its outlook on China’s AA- long-term local-currency debt rating in April.
- “Many of those loans will not be repaid and ultimately it is the central government that will probably have to bail out either the banks or local governments, or both more likely, as they did a decade ago,” Qinwei Wang, China economist at Capital Economics Ltd. in London, said in an e-mail response yesterday to questions from Bloomberg News.
- Local government financing vehicles had loans totaling 9.09 trillion yuan at the end of November, with 1.77 trillion deemed to have repayment risks, the 21st Century Business Herald newspaper said in March.
- China’s last banking crisis was in the late 1990s, when years of state-directed credit left lenders saddled with bad loans, forcing the government to spend more than $650 billion over a decade in bailouts.
Second, China is not done yet. To keep GDP going, it appears the government has new programs that will lard even more debt onto local governments - much of which should go bad in a few years from today. At which point I assume the federal level of government will need to step in again. Rinse. Wash. Ponzi. Repeat. Bloomberg has a story about the Chinese lending binge creating a hangover in 2013 (this is a very lengthy piece, so if you want the full scoop, follow the link). That hangover should coincide nicely with timing of the next recession in the U.S., setting up for fun times in the market in 2012-2013.
- China's plan to rein in property prices with a record homebuilding program may worsen local debt risks even as it proves a boon to companies from domestic cement makers to Chilean copper exporters.
- Premier Wen Jiabao aims to build 36 million low-cost homes by 2015, an initiative that will see 2 trillion yuan ($307 billion) added to local government borrowing by 2012, bringing it to a total 12 trillion yuan, Standard Chartered Plc estimates. The surge of loans to local authorities may spark a wave of bank bailouts that hobble economic growth.
- “We’re going to see more financial shenanigans, we’re going to see more money pushed off balance sheets” as banks seek to mask the extent of their lending to local governments, said Singapore-based Fraser Howie, who co-wrote “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise,” and has been an investment banker in Asia for almost two decades. “We’re going to see some major recapitalization coming at some point” in the banking system, he predicted.
- Local governments have created more than 8,000 investment companies that allow them to get around regulations prohibiting direct borrowing. Fitch Ratings cites lending to the vehicles and to property developers in a worst-case scenario predicting bad loans could reach 30 percent of the total at China’s banks.
- “Already banks are dealing with two years worth of questionable lending and now you are going to load this on top?” asked Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management. Bad debt is “just inevitable. The question is the dimension. Is it catastrophic or is it just harmful?”
- ....the perception that bad debts in the banking sector are unlikely to materialize for a few years, according to Charlene Chu, senior director, financial institutions at Fitch Ratings in Beijing. “Investing for the long term in Chinese banks is risky,” said Chu, whose company in March said its gauge of systemic risk indicated a 60 percent chance of a banking crisis by mid-2013
- Banks had a total of 50 trillion yuan of all loans outstanding in April. Standard & Poor’s has said the bad-loan ratio may climb next year to as high as 10 percent, from 1.1 percent now.
- Social housing projects have “a pretty thin profit,” said Zhang Yi, senior analyst at Moody’s in Beijing. “It’s not like you are lending to highly profitable companies.”Chris Ruffle, who helps manage $19 billion for Martin Currie Inc. in Shanghai, said, “it’s not a great situation and I wouldn’t want to be an investor in banks” after the record boom in lending.
I am not highlighting these stories to take a pat on the back (although if I worked in a white shoes Wall Street firm, I'd be getting lauded globally "the next Roubini!" for highlighting these issues years in advance - thankfully, I'm only a lowly two bit blogger) but to highlight two things. As I said above - Wall Street only focuses on the here and now. Just like it now cries for more QE3 (because all it cares about is inflated asset values), and it applauded Greenspan, and China, and Bernanke for near term actions to keep the balls juggling - the "Street" cares nothing about the consequences of all these steroid hits. But there are costs for all these imbalances - and they eventually get paid. Second, the risks to the China story are growing going forward, as they are due to pay for their massive loan schemes of 2009. And apparently new schemes are being put into place now. Considering China is the world's linchpin for growth, it is important to be aware of this situation, which is getting little notice in the U.S. It will only matter when it matters.
Somewhere Alan Greenspan has to be laughing.