Great Wall of debt: China set to overtake US

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#1
http://www.smh.com.au/business/comment-a...zvyiq.html

Great Wall of debt: China set to overtake US
Date
July 23, 2014

Ambrose Evans-Pritchard

A new report from Stephen Green at Standard Chartered argues that China’s aggregate debt level has reached 251 per cent of GDP.

The China-US sorpasso is looming. I do not mean the much-exaggerated moment when China’s GDP will overtake America's GDP – which may not happen in the lifetime of anybody reading this blog post – as China slows to more pedestrian growth rates (an objective of premier Li Keqiang.)

The sorpasso may instead be the ominous moment when China’s debt ratios overtake the arch-debtor itself.

I had presumed that this inflection point was still a very long way off, but a new report from Stephen Green at Standard Chartered argues that China’s aggregate debt level has reached 251 per cent of GDP, as of June.

This is up 20 percentage points of GDP since late 2013. The total is much higher than normal estimates, though it tallies with what I have heard privately from officials at the IMF and the BIS.

Mr Green – a highly-respected China veteran – includes total social financing (TSF), offshore cross-border bank borrowing (a story that we are going to hear a lot about), bond issuance, shadow banking of various kinds, and government debt.

The ratio has risen by 100 percentage points of GDP over the last five years. As Fitch has argued out in the past, this is more than double the rise seen in Japan over the five years before the Nikkei bubble burst in 1990, or in the US before subprime blew up in 2007, or in Korea before the Asian financial crisis.

It is the speed of the rise that worries credit rating agencies and regulators – including many at the Chinese central bank – as much as the volume itself. Though China is scary on both fronts. It has pushed debt to $26 trillion, more than the entire commercial banking systems of the US and Japan combined. The scale obviously has global ramifications.

The FT’s Jamil Anderlini points out here that the figure is very high for an emerging economy.

Mature economies can handle a higher debt ratio for all kinds of reasons, not least because they have large assets to offset their liabilities. British figures of household debt look much more threatening than they really are because the debt is mostly for mortgages, and is balanced by high levels of equity and wealth.

Total debt levels in the US are 260pc (if you assume that the Fed will never unwind QE, which I do). So unless the Politburo gets a grip very fast, and this too would be dangerous, it may catch the US by next year.

This does not mean that China is about to crash. It has a state-controlled banking system. Therefore any bust scenario will play out in a different way, probably through much lower growth and two decades of Japanese-style extend and pretend.

As the BIS implied in its annual report: almost the entire world has now been drawn into the Ponzi scheme of unsustainable debt.

We can inflate some of it away, or we can deflate into defaults and creditor haircuts. Pick your poison.
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#2
Not worried about rising China debt: Motley Fool

Tuesday, 22 July 2014 | 11:14 CST | 1:04

David Kuo, CEO of The Motley Fool Singapore, remains optimistic on the mainland despite a new report showing that China's debt has soared to two and a half times its economy.

http://www.cnbc.com/id/101854344#.
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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#3
History Suggests China is On Verge of Banking Crisis
http://blogs.wsj.com/chinarealtime/2014/...ng-crisis/
You can find more of my postings in http://investideas.net/forum/
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#4
China scrambles to halt bad debt blowout
PUBLISHED: 1 HOUR 30 MINUTES AGO | UPDATE: 0 HOUR 0 MINUTES AGO

China's banks keep reporting bad loan levels well below what most analysts consider realistic, but their recent actions suggest the slowing economy may be squeezing borrowers and lenders harder than thought only a few months ago. Photo: AP
China’s debt more than twice size of economy: report
Shadowland: China’s dirty secret
Chinese banks are scrambling to get on top of bad debts they have downplayed for years, cutting off riskier borrowers, further tightening lending terms and, in one case, deploying teams of investigators to assess the risk of loan defaultper cent.

China's banks keep reporting bad loan levels well below what most analysts consider realistic, but their recent actions suggest the slowing economy may be squeezing borrowers and lenders harder than thought only a few months ago.

China's fifth-largest lender, Bank of Communications, assembled research teams last month to look over the assets of troubled borrowers in Zhejiang province, according to bank sources and an internal document. The province is a hotbed of China's credit stress.

BoCom denied that special teams had been set up or that there was any surge in potential bad loans in an email to Reuters. The bank said it had always placed great importance in its risk control efforts.

Bankers from other major listed lenders said they were further cutting lending to riskier borrowers, in particular smaller private companies.

"We're lending almost exclusively to state-owned enterprises in our department at the moment, because it's just seen as the least risky," said a senior loan officer at the Bank of China Ltd . The banker, who would not be named because he is not authorised to speak to the media, added that the bank had also raised the bar for state-owned firms, in particular by demanding more collateral.

Bank of China could not be reached for comment on changes to its lending practices.

Lawyers for banks say increasing numbers of transactions fall through because of lenders' last-minute risk worries.

A senior lawyer, who works for Industrial and Commercial Bank of China Ltd (ICBC) among others, said only a third of the financing deals she had been asked to work on were actually completed this year.

This compares to 70 per cent in the last two years, she said.

The lawyer declined to be named because she is not authorised to speak to the media.

An ICBC spokesman said the bank had not changed its approach to risk and the value of its non-performing loans was low.

In March, Reuters reported that Chinese banks had become unsettled by some highly publicised defaults and were toughening terms for highly indebted borrowers or those plagued by overcapacity.

Now it appears that banks are moving one step further, effectively cutting off many private firms from financing.

Regulators may welcome signs that banks have become more diligent in assessing risk, but it is bad news for policymakers and China's near-term economic prospects.

Beijing has been counting on consumption and a services sector dominated by private firms to take up the slack as it aims to cut industrial overcapacity and China's over-reliance on large state-financed investment projects.

While manufacturing and exports have been improving in recent months, a surprisingly weak service sector survey this week cast doubt on market assumptions that the world's second-largest economy would stabilise this year around Beijing's 7.5 per cent growth target.

WRONG RATIOS
The average bad-loan ratio for Chinese commercial banks reached a three-year high of 1.08 per cent at the end of June, above the regulator's 1 per cent red line, but still below most analysts' estimates which range as high as 5 per cent.

Bankers and analysts expect bad debts to rise further as the slowing economy makes it harder to repay loans taken out during the Beijing-orchestrated lending binge to soften the impact of the global financial crisis and there are signs this rise could be faster than banks may have anticipated only a few months ago.

Chinese firms remain under intense credit pressure, with strong demand for short-term debt, including high-yielding shadow banking instruments like bankers acceptance notes.

ASSESSING THE DAMAGE
Sources told Reuters BoCom's management had grown increasingly concerned about a potential surge in bad loans in some regions in mid-July. In response, it set up teams to assess the situation in Zhejiang, Shandong, Fujian, Hubei and Guangdong provinces, according to two people with direct knowledge of the matter and an internal document reviewed by Reuters.

Each team was assigned different tasks, such as checking borrowers' assets, data collection and drafting tailor-made recovery plans for troubled borrowers, the document showed.

Increased attention to bad debts and loan recovery should ensure banks maximise the value of their loan books. They have been selling off bad debts cheaply but major lenders now want to recover as many of them as possible.

"I think it is a good thing," said Chen Xingyu, a banking analyst from Phillip Securities in Hong Kong. "It'll help clarify the situation, so they can take appropriate action."

Reuters
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#5
PUBLISHED AUGUST 09, 2014

China banks addressing bad loan problem
Bankers talk of tighter risk control and cutting off small private borrowers though banks deny any change in policy

A senior lawyer, who works for Industrial and Commercial Bank of China (ICBC) among others, said only a third of the financing deals she had been asked to work on were actually completed this year - PHOTO: BLOOMBERG
'We're lending almost exclusively to state-owned enterprises in our department at the moment, because it's just seen as the least risky.'
- A Bank of China loan officer
Shanghai
CHINESE banks are scrambling to get on top of bad debts they have downplayed for years, cutting off riskier borrowers, further tightening lending terms and, in one case, deploying teams of investigators to assess the risk of loan defaults.
China's banks keep reporting bad loan levels well below what most analysts consider realistic, but their recent actions suggest the slowing economy may be squeezing borrowers and lenders harder than thought only a few months ago.
China's fifth-largest lender, Bank of Communications, assembled research teams last month to look over the assets of troubled borrowers in Zhejiang province, according to bank sources and an internal document.
The province is a hotbed of China's credit stress.
BoCom denied that special teams had been set up or that there was any surge in potential bad loans in an email to Reuters. The bank said it had always placed great importance in its risk control efforts.
Bankers from other major listed lenders said they were further cutting lending to riskier borrowers, in particular smaller private companies.
"We're lending almost exclusively to state-owned enterprises in our department at the moment, because it's just seen as the least risky," said a senior loan officer at Bank of China.
The banker, who would not be named because he is not authorised to speak to the media, added that the bank had also raised the bar for state-owned firms, in particular by demanding more collateral.
Bank of China could not be reached for comment on changes to its lending practices.
Lawyers for banks say increasing numbers of transactions fall through because of lenders' last-minute risk worries.
A senior lawyer, who works for Industrial and Commercial Bank of China (ICBC) among others, said only a third of the financing deals she had been asked to work on were actually completed this year. This compares to 70 per cent in the last two years, she said. The lawyer declined to be named because she is not authorised to speak to the media.
An ICBC spokesman said the bank had not changed its approach to risk and the value of its non-performing loans was low.
In March, Reuters reported that Chinese banks had become unsettled by some highly publicised defaults and were toughening terms for highly indebted borrowers or those plagued by overcapacity.
Now it appears that banks are moving one step further, effectively cutting off many private firms from financing.
Regulators may welcome signs that banks have become more diligent in assessing risk, but it is bad news for policymakers and China's near-term economic prospects.
Beijing has been counting on consumption and a services sector dominated by private firms to take up the slack as it aims to cut industrial overcapacity and China's over-reliance on large state-financed investment projects.
While manufacturing and exports have been improving in recent months, a surprisingly weak service sector survey this week cast doubt on market assumptions that the world's second-largest economy would stabilise this year around Beijing's 7.5 per cent growth target.
The average bad-loan ratio for Chinese commercial banks reached a three-year high of 1.08 per cent at the end of June, above the regulator's one per cent red line, but still below most analysts' estimates which range as high as 5 per cent.
Bankers and analysts expect bad debts to rise further as the slowing economy makes it harder to repay loans taken out during the Beijing-orchestrated lending binge to soften the impact of the global financial crisis and there are signs this rise could be faster than banks may have anticipated only a few months ago.
Chinese firms remain under intense credit pressure, with strong demand for short-term debt, including high-yielding shadow banking instruments like bankers acceptance notes.
Increased attention to bad debts and loan recovery should ensure banks maximise the value of their loan books. They have been selling off bad debts cheaply but major lenders now want to recover as many of them as possible.
"I think it is a good thing," said Chen Xingyu, a banking analyst from Phillip Securities in Hong Kong. "It'll help clarify the situation, so they can take appropriate action." Reuters
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