China Rebalancing in Reverse
In an effort to meet an absurd growth target of 6.5%, credit growth in China exploded to an all-time high, nearly half a trillion in US dollar terms in a single month!
The Financial Times reports China Bank Lending Hits Record in January.
China’s banks granted loans at the fastest pace on record in January, a sign that the government is loosening monetary policy more aggressively in an attempt to bolster the slowing economy.
New local currency bank loans to the real economy set a monthly record at Rmb2.54tn ($390bn). Credit from all sources, including bonds and off-balance-sheet lending, reached Rmb3.22tn, also a monthly record, with corporate bond issuance at an all-time high.
“Judging from recent speeches by top leaders and January’s credit growth, this year policymakers seem to be determined to make the economy grow above their bottom line of 6.5 per cent,” Larry Hu, China economist at Macquarie Securities, wrote on Tuesday.
Renminbi depreciation may also have boosted demand for loans. In the years when the renminbi was viewed as a one-way bet to appreciate, companies were eager to borrow in dollars, since the debt burden was expected to be lighter in renminbi terms when the loan came due.
Now, the opposite dynamic is at play, and many Chinese companies are borrowing in renminbi to replace foreign currency debt.
China Total Lending
To be fair some of that jump is seasonal. Lending typically jumps around the Chinese new year.
Still, this increase in lending dwarfs any previous records, especially yuan-based bank loans.
Bad Loans Highest in Decade
Bloomberg reports China’s Bad Loans Rise to Highest in a Decade as Economy Slows.
Soured loans at Chinese commercial banks rose to the highest level since June 2006 as the nation’s economic expansion slowed to the weakest pace in a quarter century.
Nonperforming loans jumped by 51% last year from end of 2014.
Separately, the People’s Bank of China reported Tuesday that new credit surged in January to a record 3.42 trillion yuan, almost double the amount in December and exceeding the median forecast of 2.2 trillion yuan in a Bloomberg survey of analysts. The increase was linked to a seasonal binge as banks front-loaded lending and Chinese borrowers refinanced foreign-denominated debt.
The CBRC data comes amid speculation that soured loans could be much larger than indicated by official data. Kyle Bass, a hedge fund manager who successfully bet against mortgages during the subprime collapse, said earlier this month that the Chinese banking system may see losses of more than four times those suffered by U.S. lenders during the 2008 credit crisis. That claim has been disputed by DBS’s Chen and analysts at China International Capital Corp and Macquarie Securities Ltd.
Should the Chinese banking system lose 10 percent of its assets because of nonperforming loans, the nation’s banks will see about $3.5 trillion in their equity vanish, Bass, the founder of Dallas-based Hayman Capital Management, wrote this month in a letter to investors obtained by Bloomberg. Larry Hu, a China economist at Macquarie in Hong Kong, said in a research note on Monday that Bass’s estimate could be too large as it implied a true bad-loan ratio for China banks at 28 to 30 percent.
China Attempts to Fix Bad loan Problem by Changing the Rules
As bad loans mount, Chinese banks Seek Rule Change to mask the problem.
In 2015, China’s non-performing loans reached a 10-year high of 1.27 trillion yuan, a 51% rise from a year ago. The average bank non-performing loan ratio rose to 1.67% at the end of December from 1.59% three months earlier.
As a result, non-performing loan coverage ratio – the amount of cash banks have to cover bad loan losses – has dropped to 181% by year-end from 233% a year ago.
Currently, Beijing requires banks to keep at least 150% coverage ratio. But banks are cutting close. As of the end of September, China’s four big banks, China Construction Bank (939.Hong Kong), Bank of Communications (3328.Hong Kong), ICBC (1398.Hong Kong) and Bank of China (3988.Hong Kong) reached bad loan provision ratios of 179%, 165%, 158%, and 154% respectively. As more loans turn sour, they may breach the bottom line.
Well-respected Chinese financial magazine Caixin reported this morning that China’s big banks have been talking with China Banking Regulatory Commission around the Chinese New Year about relaxing the current provision rules. The banks say 100-120% coverage ratios are a more acceptable metric.
Foolish Attempt to Meet Absurd Growth Estimates
Look at the cascade of problems caused by ridiculous growth targets. Countries would be better off not having GDP targets at all.
The economy will do far better on its own without the bubble-blowing efforts of central planners to prevent deflation and hit growth estimates.
Mike “Mish” Shedlock
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Tony Bennett said:
“Nonperforming loans jumped by 51% last year from end of 2014.”
Sounds a tad “hard landingish”.
Mishtalk has some ardent believers of the china “miracle” … let me grab some popcorn and wait for the rebuttal(s) …
vinz klortho said:
Lets see, when the US banks got their tits in a wringer with non performing loans, the Fed stepped in and made everyone, except Lehman and Bear Stearns whole. Looking back, I’m not sure what purpose was served by letting them die, other than the fact that the CEOs of Lehman and Bear were total a-holes. But that’s a feature, not a bug, of Wall St. CEOs.
I wonder what will happen if the Chinese banks get into the same predicament?
Oh yeah, the PBOC steps in and makes all of the politically connected people whole again.
I don’t see any difference between what China is doing, and what the US did, and I don’t see any issue with resolving the problems in the same way.
So what if their currency depreciates? Just makes their exports more competitive.
In the U.S. the C-level executives keep their past gains and the company goes bankrupt.
In China the C-level executives are shot and their families lose anything the government can find.
The lesson here is to not call a hard landing in China too early. Instead watch the body count.
GOT SOME QUESTIONS:
Q: THE MONEY CHINESE BANKS/ GOVT LOAN COMES FROM INTERNAL RESERVES AND NOT FLOATING BONDS ON THE INTERNATIONAL MARKETS, RIGHT?
Q: SO IF I’M CORRECT WHAT HAPPENS TO A BAD LOAN? ASSUMING THAT THE BUSINESS FAILED AND THE MONEY WASN’T OUTRIGHT STOLEN THEN THE “LOAN” HAS BEEN COVERTED INTO A NONPRODUCING ASSET. WHICH MEANS THERE IS ALWAYS THE POSSIBILITY THAT SOMEONE ELSE WILL ASSUME THAT NONPERFORMING ASSET AND MAKE IT PRODUCTIVE, RIGHT?
Q: CLASSIC CAPITALISM SAYS MONEY MOST ALWAYS BE IN CIRCULATION, IE, BUYING STUFF, MANUFACTURING STUFF, SELLING STUFF AND REINVESTING CAPITAL INTO EXPANSION OF YOUR BUSINESS RIGHT?
KEYNES CONCLUDED RIGHTLY, THAT THE REASON WHY CAPITALISM COLLAPSES IS THAT TO MUCH MONEY IS REMOVED FROM THE CYCLE AND EVERYTHING SEIZES UP, RIGHT?
KEYNES’S SOLUTION WAS TO PRY THE NONPRODUCTIVE WEALTH / CAPITAL OUT OF THE HANDS OF THE HOARDERS AND TO PUT IT BACK INTO CIRCULATION BY GIVING IT BACK TO THE MANY. KEYNES’S WAY OF DOING THIS WAS: (1) TAX THE RICHES’S NONPRODUCTIVE WEALTH AND (2) CREATE WORK THE THE MASSES OF UNEMPLOYED.
SEEMS TO ME THAT OVER THE PAST 100 YEARS OR SO REVOLUTIONS WERE MOTIVATED BY A LACK OF WORK THAT LED TO POVERTY, RIGHT?
NOW FDR WANTED THE GOVT TO PAY PEOPLE FOR ACTUALLY PRODUCING SOMETHING AND TO LEND MONEY (EG, FHA) TO RESTART THE BUSINESS CYCLE. THE REPUBLICANS THROUGH THEIR CONTROL OF THE SUPREME CT BASICALLY CHANGED THAT TO WORKFARE. IN OTHER WORDS AN UNEMPLOYED LABORER WASN’T PAID FOR THE WORK HE PEFORMED BUT WAS SIMPLY GIVEN A STIPEND–SORT OF LIKE WELFARE TODAY–RIGHT?
Q: SO ISN’T JINPING AND THE CENTRAL COMMITTEE BY SETTNG A HIGH GROWTH OBJECTIVE AND HANDING OUT LOANS GENEROUSLY A KEYSENIAN MOVE? I MEAN THERE ARE A LOT OF CHINESE OUT OF WORK AND EVEN MORE THAT NEED A REAL JOB. I MEAN BE A FARMER USUALLY DOESN’T CUT IT.
WOULDN’T THIS ALSO INCREASE THE WEALTH OF THE AVERAGE CHINESE AND MAKE THE CHINESE LESS DEPENDENT UP EXPORTS? I MEAN ONE OF THE THINGS THAT MADE THE AMERICAN ECONOMY POWERFUL BEFOR 1970 WAS THAT WE PRODUCED MOST OF WHAT WE NEEDED AND EXPORTED THAT WHICH WE COULD FIND A MARKET FOR, RIGHT? ISN’T THIS A WEAKNESS FOR BOTH THE CHINESE AND RUSSIAN ECONOMIES THAT PERHAPS THEY ARE USING THE CURRENT ECONOMIC CRISIS TO BENEFIT FROM?
Q: IT SEEMS TO ME THAT THE FOOLISH POLITICIANS IN THE “WEST” ARE PUSHING FOR A NEW DARK AGE OF FEUDALISM. IT SEEMS THEY AREN’T INTELLIGENT ENOUGH NOT ONLY TO COPE WITH A MANUFACTURING ECONOMY BUT THE WORLD OF FREE MARKETS THAT THEY’VE CREATED. SO INSTEAD OF PLASTIC TABLEWARED FROM CHINA LET EVERY MAN WOMAN AND CHILD CARVE A WOODEN BOWL, ISN’T THAT THE DIRECTION WE ARE HEADING?
THEREFORE ALL INTENT PUPOSES SHOULD THE REST OF THE WORLD CONSIDER THE WESTERN ECONOMIES DEAD? SO CHINA AND RUSSIA ARE BASICALLY WHERE THE USA WAS IN SAY THE EARLY 20TH CENTURY, POISED TO SEIZE THE LEADING ROLE IN THE WORLD ECONOMICALLY SPEAKING? AND IN ORDER TO HAVE EXPORT MARKETS FOR THEIR PRODUCTS THEY ARE BUILDING UP DEPLETED ECONOMIES TO WHERE THEIR WORKERS ARE MAKING ENOUGH TO BUY CHINESE AND RUSSIAN EXPORTS?
Q: ” Should the Chinese banking system lose 10 percent of its assets because of nonperforming loans. . .” “NONPERFOMING LOAN” DOESN’T MEAN THAT BUSINESS ISN’T MEEGTING ITS PAYROLL AND SELLING STUFF. IT JUST MEANS BECAUSE OF THE BAD ECONOMICS IT ISN’T MAKING ENOUGH TO PAY BACK ITS LOAN. SO HOW MANY OF THOSE “NONPERFORMING” LOANS CONCERN BUSINESSES THAT ARE DEFUNCT AND PLANT AND EQUIPMENT THAT IS RUSTING AWAY?
WHEN YOU TALK ABOUT NONPERFORMING LOANS HOW DOES THAT $200 TR IN GOVT LOANS/ WARRANTS/ WHATEVER THAT THE AMERICAN PEOPLE HAVE LEANT THE FIRE INDUSTRIES PERFORM?
ISN’T A SOCK MANUFACTURER WHO CAN’T MEET HIS LOAN OBLIGATIONS BUT IS BUYING COTTON AND KNITTING MACHINES AND PLATIC BAGS AND EMPLOYING PEOPLE BETTER FOR AN ECONOMY THAN A BUNCH OF CROOKS BETTING ON WHETHER OR NO A FLY LANDS ON JANET YELLEN’S LUNCH?
Q: SO LONG AS THE DEBT AND THE ASSETS REMAIN IN RMB AND IN CHINA ISN’T THAT A WASH? OR TO BORROW AN ECONOMIST TERM, ISN’T THAT STERILIZED MONEY?
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Godfree Roberts said:
This is a little puzzling. China’s Banking Regulatory Commission says that the trend of rising bad loans, or non-performing loans, is within expectations, and overall risk is under control. Official data showed non-performing loan ratio at China’s commercial banks rose to some 1.6 percent at the end of last September, while loan-loss provision coverage ratio, the ratio of provisions held to gross non-performing loans, stood at some 168 percent. http://www.china.org.cn/business/2015-11/06/content_36996230.htm.
Incidentally, the total of NPLs across Europe is about 1 trillion euros ($1.1 trillion), equivalent to the size of Spain’s annual gross domestic product (GDP) and 7.3 percent of the EU’s GDP. Non-performing loans (NPL) across Europe’s major banks averaged 5.6 percent at the end of June, down from 6.1 percent at the start of the year.
But that compares with an average of less than 3 percent in the United States. Go USA. http://www.acting-man.com/?p=41659 .
I wouldn’t be surprised if a lot of this money is basically stolen.
My Chinese parents in law woke up one morning last September to find their bank accounts empty, courtesy of China Construction Bank. Turns out an old business partner had forged both their sigs on a loan of 20M RMB and then split. That case got settled without them ever being notified, but after this initial inconvenience they discovered another still pending case over a 10M RMB loan on which FiL’s sig had also been forged. Luckily that one was quickly dropped, but apparently the corrupt officer at CCB has “retired” and the new guy’s proven quite the bastardio.
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