Anatomy of China’s credit bubble

Discussion in 'China' started by Srinivas_K, Feb 13, 2014.

  1. Srinivas_K

    Srinivas_K Senior Member Senior Member

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    Anatomy of China’s credit bubble

    China’s credit bubble bears an eerie similarity to the US housing bubble with common underlying causes at work

    China’s wall of credit has begun to crumble. Last Friday, a high-yield investment product that attracted funds worth 289 million Yuan from clients of China Construction Bank (CCB)—China’s second largest lender—turned sour as the Chinese coal company that received loans through the product defaulted on its obligation.
    Last month, after initial reluctance, the Industrial and Commercial Bank of China (ICBC) bailed out investors in a similar investment product (named “Credit Equals Gold #1”) that was clearly on its way to default.
    The blame for the brewing credit crisis in China has been squarely laid on inadequate regulation of the shadow banking industry, which has been known to make risky loans in search of high yields. As calls for more regulation grow louder, it is worth comparing China’s credit crisis to the US housing bubble to understand the common underlying causes of both.
    The US housing boom was fuelled by two factors: the government’s push to provide affordable housing to the poor, coupled with easy funding provided by the Federal Reserve under Alan Greenspan.
    US mortgage debt as a percentage of gross domestic product (GDP) increased from less than 50% in the 1990s to close to 75% in 2008, giving an idea of the easy money policy adopted by the Fed.
    And much of the lending was done indirectly through Fannie Mae and Freddie Mac—government sponsored enterprises (GSEs) buying mortgages in the secondary market—that provided financing for up to 75% of new housing mortgages by 2007, including much of the sub-prime mortgages.
    Taken together, this translated to an asset bubble fuelled by the central bank and worsened by loose lending standards promoted by the government.
    When the Fed finally reversed its easy money stance, higher interest rates—combined with falling housing prices due to lower volume of credit creation—led to a series of defaults. The willingness of GSEs to take the risk posed by mortgage-backed securities linked to sub-prime borrowers, who didn’t make for great borrowers even under normal circumstances, did not help much either.
    China has witnessed something similar, with an unsustainable boom fuelled by easy credit made worse by government-sponsored shadow banks. As far as the credit binge is concerned, private credit in China has jumped from $9 trillion in the wake of the crisis to $23 trillion in 2013. The increase in Chinese banking assets has surpassed the monetary easing of other countries, including the US, by many times over.
    This has clearly fuelled the massive property boom that the country has witnessed over the years.

    The fact that Cinda Asset Management Company, the largest shadow bank in China, is actually a creation of the Chinese Ministry of Finance (MoF) gives it an eerie similarity to Fannie and Freddie.
    Initially created to bail out Chinese banks through the purchase of distressed assets, Cinda—with great push from the government to increase lending to businesses—later expanded its operation to become a regular buyer of risky assets from Chinese banks. Many such shadow banks created by the government have magnified the risk of moral hazard in the system, as banks can simply make risky loans and offload them on shadow banks which are pushed to purchase them. They are also a major source of funding for unsound investment projects.
    Today, China grapples to contain the credit-fuelled boom made worse by aggressive lending pushed through shadow banks. But credit booms are sustained through continued expansion of money supply, failing which mal-investments begin to be exposed. China’s M2 money supply growth failed to keep pace with historic trends starting late 2011—when the figure clocked its slowest growth in a decade. Also, ever since the Chinese government announced its intention to soft land the economy, money market rates have pointed to signs of a liquidity squeeze. The series of defaults China currently witnesses clearly points to an economy that is faltering, as credit expansion fails to achieve the increasing pace required to sustain phony investments, and a major underlying reallocation of resources in progress.
    After the US housing bubble burst, much of the blame was shifted to the lack of regulations scrutinizing the purchase of mortgage-backed securities by Fannie and Freddie—of course, conveniently ignoring that these GSEs were patronized by US governments over many decades to subsidize housing. More importantly, that easy funding through Fannie and Freddie was made possible only through the Fed’s loose monetary policy under Alan Greenspan was not reflected upon sufficiently either.
    Mainstream reaction to China’s crumbling credit bubble, which has the same underlying causes at work, shows quite clearly that policymakers have still not learnt the right lessons and will probably continue to prescribe the same old wrong-headed solutions to the current Chinese mess as well.

    Anatomy of China’s credit bubble - Livemint
     
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  3. Ray

    Ray The Chairman Defence Professionals Moderator

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    So, does it mean China is having a sinking feeling?
     
  4. hbogyt

    hbogyt Regular Member

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    No worries. QE China edition. :rofl:
     
  5. Srinivas_K

    Srinivas_K Senior Member Senior Member

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    Chinese communist Party has this sinking feeling but they will censor the news and come up with some manipulated stats so that people of China will believe that china indeed had avoided the crisis.

    They will also add 4 or 5 points to the nearest country when calculating GDP so that their superiority(only in stats) is unchallenged.

    Like if GDP growth rate on average of other BRICS nations is 5 % then CCP will add 3 or 4 points and show China achieved 8 or 9 % growth.
     
    Last edited: Feb 13, 2014
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  6. CCP

    CCP Senior Member Senior Member

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    Again, send your true data to IMF, world bank or UN...
     
  7. Ray

    Ray The Chairman Defence Professionals Moderator

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    Why?

    so that they can buoy China up?

    That sinking should be watched so that Asia becomes a zone of peace and China does not have loose money to do foot loose activities!
     
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  8. CCP

    CCP Senior Member Senior Member

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    That is just your hoping.
     
  9. Ray

    Ray The Chairman Defence Professionals Moderator

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    No.

    In economics, one does not hope.

    I was merely answering!
     
  10. CCP

    CCP Senior Member Senior Member

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    If Chinese economy is still growing faster than most countries in the world, how "That sinking " could be happened?
     
  11. Ray

    Ray The Chairman Defence Professionals Moderator

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    Search me!

    Ask the Hongkong newspaper and the world media.
     
  12. CCP

    CCP Senior Member Senior Member

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    Google : China export 2013
     
  13. Srinivas_K

    Srinivas_K Senior Member Senior Member

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    Ray likes this.
  14. CCP

    CCP Senior Member Senior Member

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  15. Srinivas_K

    Srinivas_K Senior Member Senior Member

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    LOL!!

    Western economies are not buying anything these days, USA is still recovering and Chinese are boasting that they are targeting export rise.

    and then there is some manipulations in the the stats they show.

    Even Google and microsoft are censoring any news and pics on the internet that picture CCP in bad light.

    Chinese is a synonym to fake/pirated/manipulated stats/cheap copies/foolish hegemony/ no human rights/bad manners/ .......... remaing words I will update soon.
     
  16. Ray

    Ray The Chairman Defence Professionals Moderator

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    Chinese trade posts surprise acceleration

    Stronger-than-expected figures trigger rally in Australian dollar and Asian stocks but raises doubt over quality of the data


    A surprise acceleration in Chinese trade for January has eased fears of a slowdown in the world's second biggest economy.

    Imports rose 10pc to $107.2bn (£65.2bn), up from January's 8.3pc growth, trade data showed Wednesday. Exports rose 10.6pc to $126.7bn, more than double the previous month's 4.3pc expansion, leaving the country with a $31.9bn trade surplus for the month.

    The figures surprised economists who had expected unusually weak figures for January because during the comparison period a year earlier exporters were believed to be inflating sales figures as an excuse to evade currency controls and bring extra money into China for investment.

    "With these factors holding back export growth, the performance in January, at least first glance, looks even better than the headline expansion suggests," said Julian Evans-Pritchard of Capital Economics.

    The stronger-than-expected figures triggered a rally in the Australian dollar and stocks and helped Asian stocks rise for the forth consecutive day, more than offsetting negative sentiment created by a slump in Japanese machine orders.

    China's January trade data is especially volatile since it is affected by the variable timing of the Chinese New Year celebrations. Economists at Societe Generale said they expected February data to be weak and cautioned that data for the first two months of the year should be considered together.
    Louis Kujis, an economist at RBS, welcomed the strong trade figures, but sounded caution over the quality of the data.

    "It's fair to say that this should not make people more nervous about global demand and China's economy, but I also think we have to keep on scrutinising the data and wondering how much this really means," he said.

    Gerard Lane, analyst at Shore Capital, questioned the accuracy of the official data since it painted a much stronger picture of the economy than separate industry surveys.

    "The mismatch between the trade data and New Export Orders with the PMI surveys does raise an issue in terms of data quality, in our view, especially given the history of data invoicing seen in 2013," he said.

    China's economic growth of 7.7pc last year, while stronger than the developed economies, matched 2012 for its weakest annual growth since 1999.

    The Chinese government has signalled that it welcomes slower, more sustainable economic growth, and is comfortable with economic expansion easing to 7pc. Authorities, however, have unleashed a number of mini-stimulus measures in the past year to moderate the economic slowdown.

    Chinese trade posts surprise acceleration - Telegraph
     
  17. t_co

    t_co Senior Member Senior Member

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    Why would the IMF or World Bank have an incentive to puff up China's economy for 'foot loose activities', given that the West is actively trying to contain China?
     
  18. t_co

    t_co Senior Member Senior Member

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    Patriotism is love of one's own country. Nationalism is hatred of every other country. The two are not the same.

    You're descending into incoherence at this point. @pmaitra, please put him out of his misery.
     
    Last edited by a moderator: May 10, 2015
  19. t_co

    t_co Senior Member Senior Member

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    On topic: China's economy is headed for a transition and deleveraging. A gradual descent in GDP growth rates over the next few years means the transition is working, although we may have to watch bank balance sheets and the volume of bankruptcy cases heading through provincial courts for a more direct barometer as to the rate of change.
     
  20. Ray

    Ray The Chairman Defence Professionals Moderator

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    Are they giving incentive to China?
     
  21. Ray

    Ray The Chairman Defence Professionals Moderator

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    Why do you want @pmaitra to act on your diktat?

    This is not China that one can just put people out of misery because they oppose the system.

    That is the difference.
     
    Last edited by a moderator: May 10, 2015

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