China's Short Term Debts and Long Term Poblems

[seenitallb4]

About 7 or 8 years ago a friend of mine who is a manager at a Chinese state owned bank was telling me about their own bailout. The banks were essentially on their knees after being forced into a massive programme of politically-directed lending. This lending had been going on for a while and was accelerated in the aftermath of the Asian financial crisis. The net effect was that the banks had a massive build up of non-performing loans and were in need of an epic bailout. Naturally enough, the state stepped in to bail them out, and their NPLs were transferred to 4 (?) asset management companies in return for government backed bonds.
Time passed on and the Chinese economy returned to red-hot growth. As our banks were making questionable bets, the Chinese banks started to grow more profitable and more powerful. Massive IPOs in HK left them well capitalised, the profits of growth left them in a robust position, and they looked on with justified amusement at the calamitous fate of many Western banks.
Then the financial meltdown happened and Chinese exports dropped off the edge of a cliff. Eager to maintain social stability and fearful of the impact of mass unemployment on political stability, the government decided to flood the economy with more state-directed lending. The equivalent of over a trillion dollars was pumped into the economy from January to September of this year, mostly into capital projects, and the specific details of the projects funded were left to local and provincial governments. Shortly thereafter the stock market took off on another one of its mad little tears, indicting that a lot of the loans were being used for the purposes of speculation rather than investment in real assets. Even so, the majority of it flowed into various construction projects and assorted bridges to no where to the extent that a huge % of this years growth came from stimulus spending.
The result of all of this is that Chinese banks are now in a somewhat less than invincible position. The bonds from the earlier bailout mature very soon and the latest indications are that they asset managment companies can't pay. As far as I know there are about 800 or 900 billion RMB worth of bonds that may fall into this category. Add to that the 1 trillion USD plus in forced political lending from the recent stimulus, much of which was clearly used for speculation and white elephants, and the things begin to look less than invincible. Could it be that the Chinese are falling into the same trap that Japan fell into in the 1980s and that the US have been stuck in for a while now?
I know that the fundamentals are different and that both the Chinese economy and the Chinese banks are in a much stonger position than those of, say, the USA or GBR, but it can be argued that the days of massive export led growth are over (mainly because their customers are broke). As growth slows, just like it did for Japan and all the other former tigers, can they indefinitely respond by having more government-driven lending? Already many of the smaller banks can onlt barely meet their capital adequacy requirements. On top of that, can China also pay for both its current unfunded pension liabilities and expand its welfare to cover the 80% who are currently uncovered? And also, can it meet all these challenges while at simultaneously dealing with a chronic water shortage, a massive environmental clean up bill, and the challenge of up to 70,000 riots per year?

[mryoungdan]

Possibly a short thread.

[Squire Allworthy]

Possibly a short thread.

Indeed mentioned the overheating in the Chinese economy elsewhere and it sank without a ripple.

There are concerns about the misappropriation of funds causing rises in the composite which has fallen back from its high of August and overheating in the property sector.

This is from Reuters this morning,

"Worried by the spike in house prices, authorities in Beijing, Shanghai and other major cities attempted to curb speculation by introducing measures in July to make it harder for people to apply for second mortgages." Pity the title didn't say UK instead of China and it was the UK Government who had taken action to lower house (or home - as in title) prices.

Clearly they have too much money slushing around with no useful home but tightening up on money supply in the face of reduced export demand would cause all sorts of internal difficulties. They have one very significant advantage over western economies and that is labour costs. They can respond quickly to any increase in demand elsewhere.

There are also questions to be raised about China and the dollar.

Be interesting to see how this one plays out.

[Cassandra Syndrome]

Indeed mentioned the overheating in the Chinese economy elsewhere and it sank without a ripple.

There are concerns about the misappropriation of funds causing rises in the composite which has fallen back from its high of August and overheating in the property sector.

This is from Reuters this morning,

"Worried by the spike in house prices, authorities in Beijing, Shanghai and other major cities attempted to curb speculation by introducing measures in July to make it harder for people to apply for second mortgages." Pity the title didn't say UK instead of China and it was the UK Government who had taken action to lower house (or home - as in title) prices.

Clearly they have too much money slushing around with no useful home but tightening up on money supply in the face of reduced export demand would cause all sorts of internal difficulties. They have one very significant advantage over western economies and that is labour costs. They can respond quickly to any increase in demand elsewhere.

There are also questions to be raised about China and the dollar.

Be interesting to see how this one plays out.

China isn't as strong as some people make out. Their exports are down 40%. And their huge stimulus package of 1 Trillion has ran out. They bought loads of gold and raw materials and lots in reserve, but their economy is in bad shape.

[meriwether2]

Interesting analysis.

There was an article in the FT a few weeks ago about bull and bear attitudes towards China.

The bears made the point that the stimulus programme was almost entirely spent on the construction industry, which has fuelled a property bubble, which in turn has fuelled the stock market.

Now, I have no idea, or simply couldn't comment on the significane of these bubbles, or the consequences if they burst.

David McWilliams had a good article in the Indo yesterday about China. He said they are engaging in an asset buying spree globally, using the dollars they have hoarded. These are assets such as mines. He said the good thing about this is they are securing resopurces, and getting rid of tatty dollars.

So perhaps, in the medium term we may see a bit of uncertainty, but long term, they will still take over the world?

[Clanrickard]

So perhaps, in the medium term we may see a bit of uncertainty, but long term, they will still take over the world?

No they won't. No thuggish dictatorship can survive long term as seen by the USSr's welcome demise. Expect Brazil and India to better compete especially in the services are where China is weak. China has lots of factories making things in old style heavy industry but to be a modern economy you need services like IT and Finance and industries like Pharmaceuticals, Aeronautics and Engineering. China is poor in these are because of the nature of the country. You must have free movement of people, ideas and capital to facilitate this but this goes contrary to what is still a government with an old fashioned Communist mentality.

[Cassandra Syndrome]

Interesting analysis.

There was an article in the FT a few weeks ago about bull and bear attitudes towards China.

The bears made the point that the stimulus programme was almost entirely spent on the construction industry, which has fuelled a property bubble, which in turn has fuelled the stock market.

Now, I have no idea, or simply couldn't comment on the significane of these bubbles, or the consequences if they burst.

David McWilliams had a good article in the Indo yesterday about China. He said they are engaging in an asset buying spree globally, using the dollars they have hoarded. These are assets such as mines. He said the good thing about this is they are securing resopurces, and getting rid of tatty dollars.

So perhaps, in the medium term we may see a bit of uncertainty, but long term, they will still take over the world?

China massage their books more than anyone in the planet. But a good gauge on their performance is the Baltic Dry Index, which has halved since June. (80% of its peak last year )
I have a thread in this section that follows its performance.

[meriwether2]

No they won't. No thuggish dictatorship can survive long term as seen by the USSr's welcome demise. Expect Brazil and India to better compete especially in the services are where China is weak. China has lots of factories making things in old style heavy industry but to be a modern economy you need services like IT and Finance and industries like Pharmaceuticals, Aeronautics and Engineering. China is poor in these are because of the nature of the country. You must have free movement of people, ideas and capital to facilitate this but this goes contrary to what is still a government with an old fashioned Communist mentality.

Hopefully.

[seenitallb4]

MacWilliams' analysis is correct- they are buying as many hard assets as possible and they are playing their hand as best they can. One hard asset that they can't buy is water and these guys are running out fast. I know that myself because I used to live right beside where the Yellow river used to flow until it dried up. It a pretty serious problem and I will be very interesting to see where this will lead. In fact, we all have water problems, but the Chinese situation is worse than most.

Impending Water Crisis in China | The Arlington Institute

Something else that it is running out of is people- hard to imagine but entirely true. This is as a result of the one-child policy and they will face the same demographic pressures (pensions and productivity) as most of the rest of the world.

As far as their economy goes, I think they are not really taking advantage of their people. China used to be a very entrepreneurial place but now it's all about state owned or state connected companies taking the lions share of most domestic markets. The extent to which the really productive sectors (small enterprises) get crowded out is amazing- even with 1 trillion in lending, most new ventures cannot get access to finance without serious patronage. This saddens me because I don't buy into the "uncreative Asian" stereotype- the Chinese are seriously inventive, very well educated and hungry for success, If the government would just get out of the way and let their small enterprises access credit, I believe that they would be much better off. It's a sad thing to see so much talent and creativity lose out on contracts simply because they don't know somebody who knows somebody or because some political type doesn't get bribed enough.
The other big question is the financial one. The Chinese have issued more money this year than the Japanese did when they tried to stimulate the economy in the 80s (I forget which year), and they have a few more bullets left should they need to go again. And if they need to go again, they will because a strong economy is the only thing that keeps the CCP in power. This brings me back to my original question- if the Chinese keep creating money and spending that money in areas where there is already overcapacity or where there is already a long term bubble, will they go the same way as Japan and the US? The Chinese know how to learn from the mistakes of others- will they do so this time?

[toughbutfair]

Just out of interest, you get the "your fired" call on Monday - where do you go?

I don't fancy sitting around scratching, I'd probably leave (the bank can go swing for the mortgage - instead of paying it off I've been saving hard elsewhere).

There doesn't seem to be many opportunities around? is it just a case of finding a cheap part of the world to live for a few years, get new experiences etc?

Anywhere good?