zach kang's  Instablog

I cam accross this piece on az-china.com:

"

With heightened concerns over China's leverage, non-performing loans and property market bubble, the market is anticipating some form of crisis originating from the banking sector.We believe there are increasing risks in the Chinese financial system, however, the risk is not as severe as they were for the US prior to the Global Financial Crisis. A comparison of the US and China appears frequently in the media, but we remind our readers of some differences between the US and China:

• The key differentiator is financial innovation in the US, which China has not developed to the same extent i.e. structured finance, CDOs, CDs
• Toxic sub-prime loans, Ponzi finance. We don't see that in China YET, but China could easily get there
• The PBOC is much more prudent than prior to the GFC (Global Financial Crisis), and they learned the lesson of Lehmon
• China is building up leverage, but not as severely as the US
• The banking sector is backed by the CIC, PBOC, and a government with limited external debt
• The US relied primarily on debt and consumers with debt, whereas China has an investment, export-led growth model'

Many of the conclusions above are exactly what i call the illusions of the Chinese economy.

"■The key differentiator is financial innovation in the US, which China has not developed to the same extent i.e. structured finance, CDOs, CDs"
Clearly the writer has been looking at the wrong indicators. the problem concerning structured finance in general is that it has greatly increased bank exposure to real-estate related investment. Eventhough loans to developers and morgages is only 22% of Chinese banks' total loan book. the banks are also greatly exposed to real estate related local government founding vehicles, Wealth Management Programs with many ties to real estate. Meanwhile, you can ask just about every business owners here in China, they will tell you in one way or another a lof of their loans are granted using real-estate as collateral. I will argue at least one-third of bank credit exposures are real estate related.
"■Toxic sub-prime loans, Ponzi finance. We don't see that in China YET, but China could easily get there"
I believe china has already got there long ago through shadow banking. in 2012, according to PBOC "Chinese banks' share of total lending fell to only 52% of total credit creation, down from 92% a decade ago". in the first two month of 2013 nonbank lending account to almost 65% of the new credit issuance. Most of these loans have been given to property developers,empty houses investors and ponzi borrowers without any rish prevention program in place. Anyone smell "sub-prime"?
"■ The PBOC is much more prudent than prior to the GFC (Global Financial Crisis), and they learned the lesson of Lehmon"
Ummm. let's hope that history doesn't repeat itself. I will list one simple fact that about the wealth management products which you can easily access in just about every banks in China, has kept loans off banks' balance sheets. Fitch estimated that about 13 trillion RMB (2 trillion us dollors) of WMPs were out standing by the end of 2012. I can only assume that not doing enough homework has created the prudent illusion you have about PBOC.
"■China is building up leverage, but not as severely as the US"
Again, It is true if you are only looking at official number of bank loans which stands at 130% GDP. let's add on interbank assets, other assets held on balance sheet, and various off balance sheet exposures, I will argue that banks' total credit exposure is close to 280% of GDP.(I may under-estimate here).
"■The banking sector is backed by the CIC, PBOC, and a government with limited external debt"
True to the extend of Central government, but completely wrong at the local government level. Local government funding vehicles(LGFVs), the PBOC estimates stands at RMB 14.4 trillion ($2.3 trillion) in 2011. Since 2012, I have noticed the great increase in bond and trust market in China due to the tightening of banks direct involvement in LGFVs. One can only imagine what kind of interests the local governments are taking now for projects like the Bird-nest style stadiums, ghost cities across China.
"■The US relied primarily on debt and consumers with debt, whereas China has an investment, export-led growth model"
Export has no longer been the driver but the dragger of Chinese's overall growth since 2009. Investment is the only reliable driver since 2008 crash.