Inquiring minds are digging deeper into China’s bank credit bubbles, fixed asset investment bubble, and property bubbles. Please consider Closer Look: 100 Trillion Yuan in Banking Assets on Caixin Online.
As of 2010, the total assets of China’s banking industry have grown to 2.39 times the amount of national GDP, breaking records once again at nearly 100 trillion yuan. In comparison, according to OECD data, Japan’s banking assets in 2008 stood at US$ 9.81 trillion, 2.27 times the amount of its GDP, which was US$ 4.32 trillion. Germany, another country representative of economies that rely on banks for financing, had 6.6 trillion euros for banking assets and 2.48 trillion euros for GDP in 2008. Its 2008 banking-assets versus GDP ratio was 2.66, almost the same as it had been in previous years.
The surge in China’s banking assets, which took off in 2009, was attributed to political directives rather than monetary policies. In 2009, huge amounts of loans were made at the order of government. The central bank did not cut interest rates; in fact, it conducted a net absorption of liquidity from the market through its open market operations. Meanwhile, the market capitalization of domestic stock exchanges more than doubled from a year earlier, an indication of too much capital flowing around.
China’s Real-Estate Developers Struggle with Debt
MarketWatch reports China’s Real-Estate Developers Struggle with Debt
The debt carried by China’s real-estate developers jumped 41% in the March-ended year from the same period 12 months earlier, according to a report by Chinese state media.
The value of unsold houses was up 40.2% to CNY903.5 billion, the Xinhua report said. Average profit was down 4.9% to CNY54.65 billion yuan.
Chinese government measures designed to cool the housing market have made it harder for real-estate companies to replenish their working capital by quickly selling apartments.
China’s Unsustainable Growth
The above links are thanks to Michael Pettis at China Financial Markets.
Pettis commented on those articles, the unsustainable nature of China’s loan growth, and the painful rebalancing that must happen in his latest weekly Email. Pettis writes …
The fundamental imbalances are all in place and are not beginning to reverse. They will not reverse until there is a radical change in the growth model, and investment comes down sharply. Unfortunately that will also mean a sharp decline in growth.
My friend Wei Liao from Paridon, in Singapore, sent me a reference to an interview in 21st Century Business Herald (a well-regarded local newspaper) with Zhu Bailiang. Zhu is the chief economist at the State Information Center of China, a policy think tank affiliated with the NDRC, and in the interview he argued that the government shouldn’t introduce tighter monetary policies because existing limits on car and home purchases will hurt the economy.
Zhu is not a policymaker but he is a senior advisor to the very powerful NDRC, an entity usually considered less focused on correcting domestic imbalances and more focused on maintaining high growth and redistributing income to the poorer sectors of the economy. As Wei Liao points out, it is pretty rare that someone from China’s economic policymaking circle makes such a comment in the midst of what is supposed to be a tightening cycle.
I am also hearing, by the way, that there is a lot of opposition from local and municipal borrowers towards raising interest rates even further – even though in real terms interest rates have decline quite substantially. This shouldn’t be a surprise since they have a lot of outstanding debt and are expected to borrow even more this year and next. Servicing the debt is unlikely to be easy and they want more, not less, relief.
I would argue that Zhu Bailiang’s comments and the rumors of opposition to further interest rate hikes probably indicate that the very intense debate within policy-making circles continues unabated. In fact, on that note, for me the most interesting thing that happened during the SED meetings in Washington this week involved Monday’s much-commented interview on the Charlie Rose show with Wang Qishan – who is expected to be named Vice Premier next year.
The gossip that I have heard in Beijing is that both Wang and Li Keqiang – expected to be named Premier next year – understand China’s debt position, worry that the current growth model is unsustainable, and want to move quickly towards an economic growth model that de-emphasizes investment and exports. They also recognize that this will result in a sharp slowdown in growth – although not nearly as sharp as I expect.
But they will not be able to do so without a pretty complete consensus within policy-making circles. A lot of very powerful constituencies – the export sector, local and municipal borrowers, SOEs – have benefited from distortions, like the currency and the interest rate regimes that have created the imbalances. They are likely, not surprisingly, to be loathe to give these up, and so it will not be easy to arrive at a consensus.
I have many times argued that historically one of the key indicators that the high-growth investment-driven model has reached its limits as a wealth creator (i.e. is no longer allocating capital efficiently) is when we see an unsustainable increase in debt. Of course whether or not we have reached this point is still much debated, but I would argue that we started to see this at least five years ago. The surge in banking assets doesn’t give much comfort.
Dramatic Slowdown in China Coming
China is going to slow, much more than anyone thinks. The commodity producers and commodity producing countries like Australia and Canada will take a hit. In contrast, the US, Japan, and Europe will benefit from falling oil prices. However global trade in general will slow, as will employment, and corporate profits.
We are starting to see a global growth slowdown already. When China joins the siesta, the slowdown will accelerate.
For more on the global slowdown, please see Huge Cracks in Global Recovery Thesis; Industrial Production Unexpectedly Drops in Germany, France; UK Weaker than Expected
The pertinent question now is whether or not the market forces China’s hand before the Chinese leadership change next year. I think it is possible, however a sustained drop in oil and commodity prices might be enough to forestall such an event.
Regardless, the markets will likely react in advance of that slowdown, whether forced by the markets or by plan of China’s new leaders.
Mike “Mish” Shedlock
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