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LQD - Chinese Shadow Banking

by Metatone
Tue Aug 2nd, 2011 at 11:39:10 AM EST

Reading a rambling and not all that coherent article on the state of the global economy, I came across this interesting snippet:

Crash Club - what happens when three economies collide | Mike Davis | Comment is free | guardian.co.uk

In effect, a shadow banking system has arisen with big banks moving loans off their balance sheets into phony trust companies and thus evading official caps on total lending. Last week, Moody's reported that the Chinese banking system was concealing one-half-trillion dollars in problematic loans, mainly for municipal vanity projects. Another rating service warned that non-performing loans could constitute as much as 30% of bank portfolios.

Real-estate speculation, meanwhile, is vacuuming up domestic savings as urban families, faced with soaring home values, rush to invest in property before they are priced out of the market. (Sound familiar?) According to Business Week, residential housing investment now accounts for 9% of the gross domestic product, up from only 3.4% in 2003.


This is pretty alarming, because if China hits a financial crisis, then the heartening resilience of the developing world economies may come to an end - and we'll be looking at a worldwide recession. Anyone have any sources on this, beyond the effortlessly unreliable Moodys?
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[Moody's's Crystal Ball of Doom™ Technology]

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 2nd, 2011 at 06:16:21 PM EST
I'm not terribly concerned by it coming from Moody's, because they're just peddling stuff that's been out there for years.

Last I looked (maybe a year ago?), housing prices in the big Chinese cities, as well as some of the large but relatively minor ones, made Las Vegas circa 2006 look like Fargo.

I don't know the ins and outs of government finance in China (and I wouldn't trust it even if I could find reports -- at least with the US reports I can know what I'm reading), but I've heard that at the local level, the accounting has gotten completely out of hand, and that the CPC really has no control over it.

China's going to blow.  It's just a question of when and how bad.  My sense is that it will be quite bad.

Then it's on to Australia and Canada, where we can do battle against the last two ginormous housing bubbles.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Aug 2nd, 2011 at 07:13:26 PM EST
This fits with the analysis of dozens of China bears whose articles I have read over the last year or so. An enormous real estate bubble with brand new ghost cities and shopping malls, municipal finance that is almost entirely dependent on fees and sales from real estate development, etc. Add to that the stories about the actions the Central Committee has taken to slow this down and the relative lack of results and Chinese SPVs might be an explanation. They are every bit as capable as the best Wall Street and City manipulators.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 3rd, 2011 at 07:37:25 AM EST
i'm surprised they didn't follow the singapore model, where gvt stimulates building industry to build luxury skyscraper apartments, sold for $650,000 apiece, then investors can resell for -booming- value after 5 years inhabiting them.

works for them, and increasingly malaya too, from what i gleaned from a bbc doc about it yesterday.

It's a fine line between homage, parody, and consumer opportunism. Jess Walter

by melo (melometa4(at)gmail.com) on Sat Aug 6th, 2011 at 05:57:49 AM EST
[ Parent ]
Nice article here.

Call it the Great Wealth Rollover of China. The nation's banks have been introducing new wealth management investment products at a blurring pace over the past year, dazzling upper-class clients with fat catalogues of high-yield investment opportunities.

Yet Caixin has learned from bank and regulatory sources that much of the wealthy investor cash pouring into short-term, high-risk products is being rolled over by banks to provide fresh financing for long-term investments, including unfinished property developments, local government financing platforms, railway projects and private equity.

The rollover game is providing badly needed funds for infrastructure projects for which credit has dried up over the past year with every notch of monetary tightening by the central government. It's helped offset the government's rising bank deposit reserve requirement, for example, which has crimped bank lending.



And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 3rd, 2011 at 12:26:52 PM EST
dazzling upper-class clients with fat catalogues of high-yield investment opportunities.

The question is how long before people are asking if the results are as dazzling as the prospectus? Methinks a good number of "upper-class clients" will soon be contemplating the virtues of market transparency and integrity. Rule of law and enforcement of regulations are not exactly China's strengths.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Aug 4th, 2011 at 12:53:32 AM EST
[ Parent ]
how long before people are asking if the results are as dazzling as the prospectus?

If western experience is any guide, never.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Aug 4th, 2011 at 02:45:42 AM EST
[ Parent ]
I suspect that those questions crossed a few minds in the late summer of '08 through the spring of '09, even if no real reforms came from those questions.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Aug 4th, 2011 at 12:07:09 PM EST
[ Parent ]
I worry it'll wind up being the Jefferson County, AL, sewage treatment project on an almost-unimaginable scale when it finally blows.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Aug 4th, 2011 at 06:27:47 AM EST
[ Parent ]
bubble recently (part 1 part 2) that read like the US bubble on steroids. china's as deep into this mess as anyone else, but with a way crankier populace to deal with when TSHTF.
by wu ming on Thu Aug 4th, 2011 at 04:10:49 AM EST
very interesting articles, thanks wu ming!

It's a fine line between homage, parody, and consumer opportunism. Jess Walter
by melo (melometa4(at)gmail.com) on Sat Aug 6th, 2011 at 06:25:56 AM EST
[ Parent ]
I'm not very worried about a collapse in the Chinese banking system, other than for negative impacts upon some Chinese.  China is just not a major participant in international commercial capital markets in the same way Europe and the Americas are. They don't provide and of the infrastructure of the international financial system, so a collapse of some kind there will be contained within China.  Not only that, but it is likely that such a collapse could even be a positive thing for China in terms of wealth distribution because it would involve the forgiving debts but not the destruction of the physical infrastructure that the debts provided for.

It would be very similar to the way that the tech stock bubble of the 1990's provided for today's information superhighways, which continue to exist and provide benefits to the rest of us long after any claims to their wealth had been surrendered by the capitalists who funded their construction all over the world.

by santiago on Thu Aug 4th, 2011 at 02:09:15 PM EST
would be if a chinese crash led to social or political ramifications that affected chinese industrial production, which would then impact all sorts of global supply chains.

a big enough crash, and china could be looking down the barrel of a not-a-dinner-party-type revolution. much as with the last one, a bunch of global investors could lose significant chinese assets in the process. and that's not even factoring in a potential regional war coming out of such a crash or political crisis. the korean peninsula, japan's southern islands (ryukyus, senkakus), the taiwan strait, the south china sea, or the sino-indian himalayan border could all be potential flash points to distract a restive chinese populace.

by wu ming on Thu Aug 4th, 2011 at 06:48:08 PM EST
[ Parent ]
Not really, or outside of a twitch of volatility in capital markets, not much else would happen in real terms.

The reason: China just provides stuff that others could also provide if the Chinese weren't underpricing them.  China provides almost nothing that the world can't do without, and of those things, none of them would cease to continue being exported because of a collapse in Chinese banking because they have access to all the capital they need from outside of China anyway.

Wars and the like are a very unlikely outcome -- there is just a high a chance of war developing in the region from any number of other things than a financial crisis in China.

by santiago on Fri Aug 5th, 2011 at 01:39:47 PM EST
[ Parent ]
The reason: China just provides stuff that others could also provide if the Chinese weren't underpricing them.

Agree.

not much else would happen in real terms.

Here I disagree.

In the short-term, there would be a lag time before local production in the consumer nations was able to ramp-up and meet local demand.  As management of US defense contractors discovered in the 90s switching a production line from making fighter engines, say, to washing machines, say, is tricker than their MBA deranged brains thought.  (If "thought" is the word I'm looking for!  :-)  Assuming local manufacturers did decide to immediately 'get into the market' ... not guaranteed.  

Retailers would take a hit as they ran-out of product and - highly likely - then take another hit as the cost of replacement goods underwent a sharp increase due to increased labor and switch-over cost(s) resulting in lower sales.  

Bringing-up the non-intuitive potential for Chinese manufacturing to crater causing a net loss of local employment in the retail sector.

by ATinNM on Fri Aug 5th, 2011 at 02:03:21 PM EST
[ Parent ]
wu ming is right, I think to point to the really scary (but hopefully still unlikely) potential for a crisis in China to affect economic production.

For myself, I wrote this diary because of a smaller worry.

For example: (my bolding)

Market turmoil carries echoes of August 2007 | Analysis | Business | The Guardian

The dwindling band of optimists point to differences with four years ago. Many companies, especially the bigger ones, are in rude financial health after cutting costs aggressively. Parts of the emerging world, such as China and Russia, are growing strongly and may act as the locomotive for the rest of the world. In the west, interest rates are low and budget deficits high: policymakers have pressed the pedal to the floor in an attempt to get their economies moving.

As small as the Chinese economy is in absolute terms, the recovery in the West has been hung on the expansion in the rest of the world... without it we'll have to recognise that we need to think about real Keynesian stimulus... but I don't think our politicians are up to that task... so then we're onto lost decade scenarios...

by Metatone (metatone [a|t] gmail (dot) com) on Fri Aug 5th, 2011 at 05:34:14 AM EST
[ Parent ]
That's the whole problem. China is not a locomotive at all because it's government's policies refuse to support domestic consumption at high enough levels to become a big enough importer. Undoubtedly, some firms that sell some stuff to China might see a decrease in business, but because China suppresses imports altogether due to its undervalued currency policy, any decrease in exports to China will likely be more than offset by increasing exports from other countries of the world, including other LDCs which now can't compete with Chinese low prices.
by santiago on Fri Aug 5th, 2011 at 01:43:41 PM EST
[ Parent ]
The Chinese government is in trouble.  They don't allow imports of goods.  They are refusing to allow development of an internal consumer market that could threaten their low labor cost advantage.  Their low cost labor policies have gutted the ability to sell goods in the US and seems to be - Correction Requested - gutting the rest of the world's ability as well.

So ....

Who, exactly, is supposed to buy the junk they produce?

by ATinNM on Fri Aug 5th, 2011 at 02:17:30 PM EST
[ Parent ]
Exactly. Which is why a collapse of Chinese banking isn't going to be very negative for the rest of the world. It may not even be negative in the medium term for the majority of Chinese.
by santiago on Tue Aug 9th, 2011 at 10:06:02 PM EST
[ Parent ]
A number of resource dependent economies are booming because of Chinese demand for raw materials. As an example, Australia will likely slip from a relatively growing state into recession. A number of African countries will be in the same boat.

As percentages these are not so important, but given the dedication of policy makers to austerity measures, every economy that goes negative is one less source of any demand. We're heading to a pretty complete world recession - and that will make things uglier.

As for those who export, China is currently the second largest market for German firms (who are the main source of European growth at the moment.) Now reduction in that market is not disaster, but changes at the margin do matter sometimes.

by Metatone (metatone [a|t] gmail (dot) com) on Fri Aug 5th, 2011 at 03:39:54 PM EST
[ Parent ]
So, reduced Chinese imports of resources will make oil prices drop, for example? Is that really a serious problem for you or me or most people in the world?
by santiago on Tue Aug 9th, 2011 at 10:16:24 PM EST
[ Parent ]
Yes.

The last time oil prices dropped after a shock, everybody thought that Happy Days Were Here Again and went back to doing fuck all about oil dependency. A boom-oil-spike-bust-oil-crash-boom cycle is quite possibly the most painful way to transition off oil, because it means that replacement technologies will need to be viable during a combined depression and oil price bust, while everybody else will feel the pain of high oil prices every time they're not feeling the pain of depression.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Aug 15th, 2011 at 06:55:18 AM EST
[ Parent ]
So, you're arguing that China's benefit to the world is that it consumes more oil so that we can ween ourselves off of it, and that benefit might be impaired in a Chinese recession.  Hmm.  Okay, it kind of works in a perverse sort of way. But it doesn't really speak to any real critical support that China provides to the world economy.  
by santiago on Sat Aug 20th, 2011 at 02:46:07 PM EST
[ Parent ]
So, you're arguing that China's benefit to the world is that it consumes more oil so that we can ween ourselves off of it, and that benefit might be impaired in a Chinese recession.

Not quite. My argument is that a Chinese depression - even if it lasts for two solid decades - would give us a respite that should be measured in months rather than years. Oil production from currently active fields is declining pretty much exponentially, no new finds of any noticeable magnitude are being made, and between half and two thirds of the oil that's scheduled to replace declining fields is either not going to happen on that time scale (Canada and Iraq) or is scheduled to be provided by Saudi Arabia, a country notorious for being honesty-impaired when it comes to reserve estimates.

In other words, China dropping out of the game will not help oil prices on any strategically interesting time scale, but it might drop oil prices for long enough to kill off emerging substitute industries (since these tend to be capital intensive, which makes them vulnerable to temporary price drops).

And given the choice between a stop-go increase in oil prices until the price at the bottom of the business cycle exceeds the capital cost of substitute technologies versus a period of prices being sustained at demand destruction levels, you should pick the last one. Because the stop-go scenario will involve much higher peak prices, and peak prices kill oil-dependent industries just as effectively as lower trough prices kill oil substituting industries.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 23rd, 2011 at 12:20:29 PM EST
[ Parent ]
That's still the same argument though: That the best China can provide to the rest of world economically is to essentially give us an excise tax on oil, and if they have a depression, they might not be able to sustain that tax, thus complicating our transition from oil.  

That's still not a very critical feature of the world economy.  It's basically like asking whether the world can do without Walmart.

by santiago on Thu Aug 25th, 2011 at 04:08:31 PM EST
[ Parent ]
That's not what I was saying. I was answering the narrower question of whether collapsing Chinese demand for oil would be A Bad Thing. And given the present regulatory environment, why, yes it would.

For finished goods, a demand-side Chinese depression would not likely reach beyond China due to Chinese import-suppression policies against these goods. High-tech capital goods are highly sector-specific so their susceptibility to a Chinese depression - or any demand-side event for that matter - can probably not be generalised.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Aug 27th, 2011 at 02:37:01 PM EST
[ Parent ]
Special report: The shorts who popped a China bubble | Reuters

NEW YORK/SYDNEY (Reuters) -They are a rag-tag bunch, often working from home or tiny offices scattered round the world, from rural Texas to Beverly Hills and a suburb near Australia's Bondi Beach.

Some have never even been to China; most don't speak or read Chinese. And yet in the past nine months, this small group of "short sellers" has published research exposing accounting fraud at a series of Chinese companies listed in the United States and Canada, and made as yet unproven allegations against a whole bunch more.

As a result they have scuttled a once hot sub-sector of the American capital markets.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Aug 5th, 2011 at 08:19:29 AM EST


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