China has $1.5 trillion in hidden debt: Lawmaker

[p2prada]

The only way China can hide its skeletons in its rather big closet is by growth. But without inclusive growth, it is not possible to notch 9%+ growth in the long term.

Chinese economy is huge. It's collapse will have a huge domino effect in the world. Japan, South Korea and Taiwan will be the first to go. US and Europe next. Other countries like India will follow. A bad Chinese economy is bad for everybody.

 

[thakur_ritesh]

Chinese stimulus plan is simple... it is called lend lend lend. They don't do it through direct public financing, they do it through massive bank loans. If you look at how much money they have to lend to create one point in GDP, it is like a 8:1 dollar ratio. It is the most inefficient use of funds on the planet.



There is definitely going to be a day of reckoning, the question is how well can CCP hide it. They already had a bank crisis a decade ago and those bad debts are STILL floating around the system, only 20% of it was recovered. They deal with it by issuing bonds that they just keep rolling over. All those ten year bonds from the last crisis have already been rolled over. With a real rate of 30% NPL on Chinese banks, they are going to have to roll over trillions into bonds again. Just as usual, they will never get paid.

The only way China can hide its skeletons in its rather big closet is by growth. But without inclusive growth, it is not possible to notch 9%+ growth in the long term.

Chinese economy is huge. It's collapse will have a huge domino effect in the world. Japan, South Korea and Taiwan will be the first to go. US and Europe next. Other countries like India will follow. A bad Chinese economy is bad for everybody.

in that case as pointed out by p2p china needs to keep sustaining high growth rate figures and when they are down and out keep the cosmetic surgery going on to whatever extent possible else this economy is too big and too well integrated internationally now to go down and if they cant sustain those high numbers they are sure to go down and for that i hope the world does have a plan ready to take the bare minimum impact.

Armand2REP,

if possible please give good examples of "If you look at how much money they have to lend to create one point in GDP, it is like a 8:1 dollar ratio", i am just too stunned to read that, how can a hugely inefficient system like that ever be sustained and that too year after year and add to that non performing assets (NPAs) at a staggering 80% since only 20% then got recovered, that would have quite literally sucked up the whole banking system, what i also want to understand is who is buying those bonds, the public? if that is the case then they are being very smartly fooled all the way to the banks but then what happens to the promised returns? or is it the government financing all of it by those forex reserves? and if that is the case then that would mean a drastic dip in those reserves. please explain.

Badguy been here for a while. He refuses to share anything revealing.

well that was more of a fun statement since badguy will never accept anything wrong happens in china least with their economy, and let alone him sharing with us the details of all that mess, though he is quite a character.

 

[badguy2000]

Ok, since people are so interested in the "hidden loans" soo much,I share something I know about it with you.

1. what are those 'hidden loans" ?
they are "governmentel vehicle loans".
Chinese laws forbids Chinese governmental administrations to borrow loans directly from banks.so Chinese local governments had to establish some special companies and borrow banks loans indirectly with those speical companies..
those "special companies" are called "governmental vehicles" and most of them has no real commerial operational income except budgets from local government.


2.how much are those "hidden loans"?
it is estimated to be about 7-8 trilion RMB(about 1.2-1.3 trillion USD). allmost all of them are borrowed by Chinese local governments.

3.what is the use of those "hidden loans"?
Most of them are invested on urban infrastructures.

4. With what do Chinese local governments plan to pay off those "hidden loans"?
Land-granting fees.
In 2010, CHinese local government acqure 2.7 trillion RMB land-granting fees.
either Shanghai or Beijing acquired over 150Billion RMB land-granting fee last year.

5.what is the problem now?
a. such huge aquiring of land-granting fee is not sustainable.
In 2010, CHinese local government acqured 2.7 trillion RMB land-granting fees.but it increases much the cost of house-building and make house-price rocket. for the social stablity, CCP will have to suppress the rocketing house-price. so the shrink of land-granting fee is inevitable in a long rum.

b.the unbalanced distribution of land-granting fees between areas.
Some local governments can acquire huge land-granting fees.for example, the local government of either Shanghai or Beijing acquired over 150Billion RMB land-granting fee last year.they can easily pay off their "hidden loans".
However, some local governments of undeveloped areas, espeically the local governments of those inland counties acquire quite limited land-granting fees.if those "hidden loans" were not to rearranged,those counties's government would have huge problem .


6. will Chinese economy collapse for those "hidden loans"?
No.

a. 7-8 trillion RMB "hidden loans" is not unaffordable to CHinese government .
Most of the 7-8 trillion RMB" hidden loans" are long-term loans and needn't repaying soon. while the real yearly income that Chinese government can use is about 11.4 trillion RMB in 2010.

(Last year,Chinese government normal revenue totals 7.7 trillion RMB. Besides, it acquired 2.7 trillion RMB land-granting fee last year.Furthurmore, Chinese state-owned enterprises will hand over over 1 trillion RMB proceeds to Chinese governments.)

b. those "hidden loans" can be rearranged easily.
Almost all banks in China are controlled by CCP. To CCP bosses, the "hidden loans" between Chinese governments and Chinese banks are just the quarrel between their two sons.

 

[badguy2000]

BTW, since mid 2010, CCP bosses really have paid serious attention to those "hidden loans".
"serious measures" has been taken to cure the problem. What I have been busy with during the past half year is to deal with it. As a whole,such "hidden loans" started to decrease several months ago.

however, Once Chinese local governments repays off those "hidden loans" ,they would have to decrease the investment on infrastructures. Once such investments deceases, "land-granting fees" would decrease much.
So,the real preblem Chinese local governments face now is not how to repay those "hidden loans",but how to keep their budget balance after "land-granting fee" decreases.

 

[JayATL]

thank you that was very informative.

 

[Armand2REP]

in that case as pointed out by p2p china needs to keep sustaining high growth rate figures and when they are down and out keep the cosmetic surgery going on to whatever extent possible else this economy is too big and too well integrated internationally now to go down and if they cant sustain those high numbers they are sure to go down and for that i hope the world does have a plan ready to take the bare minimum impact.

China keeps the world afloat by buying all the excess raw materials it has to offer. The big service economies will weather if the dragon falls, it is the raw material producers that are going to be hit the hardest. Countries like Russia, Brazil, Iran Australia and the like.

Armand2REP,

if possible please give good examples of "If you look at how much money they have to lend to create one point in GDP, it is like a 8:1 dollar ratio", i am just too stunned to read that, how can a hugely inefficient system like that ever be sustained and that too year after year and add to that non performing assets (NPAs) at a staggering 80% since only 20% then got recovered, that would have quite literally sucked up the whole banking system, what i also want to understand is who is buying those bonds, the public? if that is the case then they are being very smartly fooled all the way to the banks but then what happens to the promised returns? or is it the government financing all of it by those forex reserves? and if that is the case then that would mean a drastic dip in those reserves. please explain.

You get to the ratio by taking China's lending/stimulus and dividing it by the percentages of GDP growth. Par example, in 2009 China lent and spent $2 trillion and had a growth rate of 8.7%. So that is $230 billion for each percent while the value of a Chinese GDP percent is only $50 billion ($5 trillion total) according to CCP statistics. I always like to put in my real calculation of Chinese GDP which is 25% less than CCP due to monster excess capacity. Knock it down to $3.8 trillion which is a more realistic figure and you get $38 billion for each percent or 6:1. Once you add up the 25-30% failed loans that will occur in following years, you easily get to an 8:1 ratio to create real growth. Even if you want to stick with CCP numbers, you are still at 6:1.

The NPLs of the last banking crisis totaled around $350 billion. They got 20% of that back through asset management companies which sold off some assets of failed companies. The rest of it was too toxic to sell. The AMCs then issues bonds (IOUs) for the outstanding balances on ten year notes back to the banks. These notes came due last year but they were deferred by the banks and reissued as the AMCs are too important for hiding their NPLs. The only thing the banks get out of it are interest payments, some AMCs were not even making that. The whole ponzy scheme is designed by PBOC to hide the debts of the big four banks.

well that was more of a fun statement since badguy will never accept anything wrong happens in china least with their economy, and let alone him sharing with us the details of all that mess, though he is quite a character.

Well, we do not want him to lose his job. lol

 

[p2prada]

a. 7-8 trillion RMB "hidden loans" is not unaffordable to CHinese government .
Most of the 7-8 trillion RMB" hidden loans" are long-term loans and needn't repaying soon. while the real yearly income that Chinese government can use is about 11.4 trillion RMB in 2010.

That's the very problem. It is not the question of unaffordable now. It is the question of being affordable in the future.

The same 8Trillion will become 20 Trillion with time. And this does not include any further loans taken in the future.

Your local govts seem to be paying off loans using assets. Other countries do that by taxing the public which is very stable. There is a limit after which assets will become useless with such huge amounts. What happens if there is a real estate bubble waiting to burst?

 

[Armand2REP]

Ok, since people are so interested in the "hidden loans" soo much,I share something I know about it with you.

1. what are those 'hidden loans" ?
they are "governmentel vehicle loans".

More specifically... LOCAL government investment vehicles (LGIV for short)

Chinese laws forbids Chinese governmental administrations to borrow loans directly from banks.so Chinese local governments had to establish some special companies and borrow banks loans indirectly with those speical companies..
those "special companies" are called "governmental vehicles" and most of them has no real commerial operational income except budgets from local government.

More specifically, they have NO real operational INCOME at all since they are payed for by bank loans.

2.how much are those "hidden loans"?
it is estimated to be about 7-8 trilion RMB(about 1.2-1.3 trillion USD). allmost all of them are borrowed by Chinese local governments.

Actually it was $1.7 trillion at the end of 2008 with a credit line of an additional $1.9 trillion. Today outstanding loans are well over $2 trillion and climbing every day.

http://www.bloomberg.com/video/58210350/

3.what is the use of those "hidden loans"?
Most of them are invested on urban infrastructures.

Most of them are invested in residential and commercial property development. A lesser fraction goes to infrastructure.

4. With what do Chinese local governments plan to pay off those "hidden loans"?
Land-granting fees.
In 2010, CHinese local government acqure 2.7 trillion RMB land-granting fees.
either Shanghai or Beijing acquired over 150Billion RMB land-granting fee last year.

If they have to pay them with land guarantees then that means they all failed. They are supposed to pay them out of their profits. Of course if land values crash, the banks are going to be up a creek without a paddle requiring a massive bailout using FOREX.

5.what is the problem now?
a. such huge aquiring of land-granting fee is not sustainable.
In 2010, CHinese local government acqured 2.7 trillion RMB land-granting fees.but it increases much the cost of house-building and make house-price rocket. for the social stablity, CCP will have to suppress the rocketing house-price. so the shrink of land-granting fee is inevitable in a long rum.

So true, when land values sink so do the collateral given to the banks by the LGIVs.

b.the unbalanced distribution of land-granting fees between areas.
Some local governments can acquire huge land-granting fees.for example, the local government of either Shanghai or Beijing acquired over 150Billion RMB land-granting fee last year.they can easily pay off their "hidden loans".
However, some local governments of undeveloped areas, espeically the local governments of those inland counties acquire quite limited land-granting fees.if those "hidden loans" were not to rearranged,those counties's government would have huge problem .

It doesn't really matter what counties go bankrupt or not, the state is still going to have to bail out the banks who don't get repaid.

6. will Chinese economy collapse for those "hidden loans"?
No.

a. 7-8 trillion RMB "hidden loans" is not unaffordable to CHinese government .
Most of the 7-8 trillion RMB" hidden loans" are long-term loans and needn't repaying soon. while the real yearly income that Chinese government can use is about 11.4 trillion RMB in 2010.

The real debt of China after all is revealed will leave with 96% of GDP in debt. China can get out of it by using those financial resources but it will leave their FOREX pretty low.

 

[p2prada]

The real debt of China after all is revealed will leave with 96% of GDP in debt. China can get out of it by using those financial resources but it will leave their FOREX pretty low.

Nearly half the Forex is Treasury bonds. Nobody will buy that at their loss.

 

[Armand2REP]

Nearly half the Forex is Treasury bonds. Nobody will buy that at their loss.

Total NPLs floating around the system will be about $900 billion. They have enough semi-liquid assets to cover the bill. They do not have to pay all 96% in a lump sum, most of the debt will be serviceable.

 

[Ray]

They believe $1.5Trillion is not shown to the govt, or rather the govt is hiding real loan figures in order to look attractive enough to get FDI.

This is similar to the Satyam scam sir. They made up false number of employees and false growth projections to attract better deals. As time passes it becomes too big to hide. Here, Raju was caught and thrown in jail with management change in Satyam. But who can throw CCP into jail?



Whenever banks loan out money, there is a certain amount of money that is lost due to bad investment. For eg; if I buy a car and I don't pay interest then I lose the car. But what will bank do with a second hand car? Reselling the car will not give them their original sum back. So, this becomes a Non performing loan. The amount that is not recovered is gone.

Now, in India all of this is open information. But in China they do not show this amount to World Bank, IMF etc.

So it affects growth calculations and investors will follow fudged figures for investment.



As simple as keeping 2 different books. One for them to audit and the other for foreign entities to audit. The Chinese central auditors are not like the CAG in India.



In China, after the financial crisis, huge sums of money was loaned out to industrialists by banks who tried keeping their factories running. But if US is no longer buying then the Industrialists shut shop and spend the money elsewhere. Since the factory shut down, the industrialists will say they cannot return the loans. The banks take over their factories at cheap rates. A loss is a loss and the money is gone.

But if they hide this fact from the outsiders. Then all they will see is that Banks in China are actually profiting much more than their banks in their respective countries. So, money starts pouring in.



Very, very serious. After a certain point cooking books will become unsustainable. Banks will announce bankruptcy. Share market will collapse. Companies who can no longer secure loans will shut shop or sell assets to make more money. That will further reduce their share value. Anything you invested from outside China, the growth disappears and your investment actually goes for a toss.

From what is known, Non performing loans are actually 20% of their total loans. While in India it is 2%. That's why they say Indian banking conditions are much more suitable for growth.



There is none. If this gets out officially then China will be in deep sh*t. Same as Satyam. A lot of people will be executed and lot of businesses will shut down. New economic policies will be formulated and China will be forced to trade Yuan for more Dollars to stabilize their economy. Yuan prices will rise along with inflation.

Of course the picture I am showing is quite extreme. But there will be major ramifications if an economy the size of China is cooking books.

Thanks.

It did clear the cobwebs.

 

[badguy2000]

That's the very problem. It is not the question of unaffordable now. It is the question of being affordable in the future.

The same 8Trillion will become 20 Trillion with time. And this does not include any further loans taken in the future.

Your local govts seem to be paying off loans using assets. Other countries do that by taxing the public which is very stable. There is a limit after which assets will become useless with such huge amounts. What happens if there is a real estate bubble waiting to burst?

you obvioulsy didn't look through my post.

1. the "hidden loans" started increasing several months ago,because CCP bosses ordered local government stopped such loans.
In fact, now,no local government dares to contiue borrowing such "hidden loans" any more,because Beijing can eaisly sack anyone that disobey the order from Beijing.
No Chinese bank president dare to go on lend such "hidden loans" to local governments any more either, because Beijing also can easily sack any bank president that disobey the order from Beijing.

2. "land-granting fee" is not "paying off loans using assets".

3. Chinese government real income has keep growing 20+% for decades. the current "11.4 trillion RMB" real income can be easily double in the coming 5 years.

 

[badguy2000]

More specifically... LOCAL government investment vehicles (LGIV for short)



More specifically, they have NO real operational INCOME at all since they are payed for by bank loans.




Actually it was $1.7 trillion at the end of 2008 with a credit line of an additional $1.9 trillion. Today outstanding loans are well over $2 trillion and climbing every day.

http://www.bloomberg.com/video/58210350/


Most of them are invested in residential and commercial property development. A lesser fraction goes to infrastructure.



If they have to pay them with land guarantees then that means they all failed. They are supposed to pay them out of their profits. Of course if land values crash, the banks are going to be up a creek without a paddle requiring a massive bailout using FOREX.



So true, when land values sink so do the collateral given to the banks by the LGIVs.



It doesn't really matter what counties go bankrupt or not, the state is still going to have to bail out the banks who don't get repaid.

oh....hehe,you seem to quite confident that you know about such loans better than me....,although it is my daily job to deal with it.....hehe

The real debt of China after all is revealed will leave with 96% of GDP in debt. China can get out of it by using those financial resources but it will leave their FOREX pretty low.

Forex has nothing to do with the available real income of governments... you are even clueless to the basic economy term.

 

[thakur_ritesh]

China keeps the world afloat by buying all the excess raw materials it has to offer. The big service economies will weather if the dragon falls, it is the raw material producers that are going to be hit the hardest. Countries like Russia, Brazil, Iran Australia and the like.



You get to the ratio by taking China's lending/stimulus and dividing it by the percentages of GDP growth. Par example, in 2009 China lent and spent $2 trillion and had a growth rate of 8.7%. So that is $230 billion for each percent while the value of a Chinese GDP percent is only $50 billion ($5 trillion total) according to CCP statistics. I always like to put in my real calculation of Chinese GDP which is 25% less than CCP due to monster excess capacity. Knock it down to $3.8 trillion which is a more realistic figure and you get $38 billion for each percent or 6:1. Once you add up the 25-30% failed loans that will occur in following years, you easily get to an 8:1 ratio to create real growth. Even if you want to stick with CCP numbers, you are still at 6:1.

The NPLs of the last banking crisis totaled around $350 billion. They got 20% of that back through asset management companies which sold off some assets of failed companies. The rest of it was too toxic to sell. The AMCs then issues bonds (IOUs) for the outstanding balances on ten year notes back to the banks. These notes came due last year but they were deferred by the banks and reissued as the AMCs are too important for hiding their NPLs. The only thing the banks get out of it are interest payments, some AMCs were not even making that. The whole ponzy scheme is designed by PBOC to hide the debts of the big four banks.

thanks a lot for the reply.

that raises a question in my mind about india's economic health. last fiscal the investment rate was 38.5% and it along with loans delivered 7.4% real gdp growth rate, now how efficient is the indian system given when both these countries are considered equally corrupt, may be with the 2g scam hitting the scene india's image might have taken a bigger beating though corruption in china's case comes across more organized and difficult to catch?

if we consider just the investment rate, it shows for every % point growth india puts in 5.2 parts and then there are the loans which get raised over seas and something more which now has completely slipped out of my mind which means if not more india does spend 6 parts to get a growth rate of 1% point.

also would like to know what are the global best and average standards on the above.

Well, we do not want him to lose his job. lol

well thats the love we have for our long lost brother, hindi-chini ofcourse are bhai bhai

 

[p2prada]

1. the "hidden loans" started increasing several months ago,because CCP bosses ordered local government stopped such loans.
In fact, now,no local government dares to contiue borrowing such "hidden loans" any more,because Beijing can eaisly sack anyone that disobey the order from Beijing.
No Chinese bank president dare to go on lend such "hidden loans" to local governments any more either, because Beijing also can easily sack any bank president that disobey the order from Beijing.

That's clearly a good move. But this isn't the only problem in China. Still I am happy that CCP is reigning in on the trouble makers.

2. "land-granting fee" is not "paying off loans using assets".

So, what is the land granting fee? How much does it cost? How long does this transaction last and when does it expire?

3. Chinese government real income has keep growing 20+% for decades. the current "11.4 trillion RMB" real income can be easily double in the coming 5 years.

Loans grow equally fast. Also the fact that NPLs grow with past NPLs in tow as baggage.

 

[badguy2000]

So, what is the land granting fee? How much does it cost? How long does this transaction last and when does it expire?

well, here is how "land-granting fee" Chinese local government acquire.

first , Chinese local governments buy "un-urbanized land" at cheap price. Those "un-urbanized land" are cheap mainly because they are usually rural/suburbs land short of infrastructures such as roads.

Second, Chinese local governments invest heavily on those "un-urbanized land" and build full modern infratructures there such as roads,electricity-supply,water-supply andtelecom. Thus, Cheap "un-urbanized land" become expensive " urbanized land".

Third, Chinese local governments aution those "urbanized land" at higher price and earn huge "land-granting fee".but such "land-granting fee" can be used only as the further development of urban areas.So,"land-granting fee" is not normal government revenue.

Fourth, Chinese local governments buy more "un-urbanized land" at cheap price with acquired huge "land-granting fee", then turn the cheap "un-urbanized land" to expensive "unbanized land" by building modern infrastructures there. Finally, Chinese local government can acquire more "land-granting fee".

so,the above 4 steps constitute of a repeatable loop. By such a loop, Chinese local government can continue to urbanize China rapidly.


Thus, in theory,as long as the "urbanized land" can be sold,the loop can be continue and Chinese local governments can keep on acquiring huge "land-granting fee".

 

[p2prada]

well, here is how "land-granting fee" Chinese local government acquire.

first , Chinese local governments buy "un-urbanized land" at cheap price. Those "un-urbanized land" are cheap mainly because they are usually rural/suburbs land short of infrastructures such as roads.

Second, Chinese local governments invest heavily on those "un-urbanized land" and build full modern infratructures there such as roads,electricity-supply,water-supply andtelecom. Thus, Cheap "un-urbanized land" become expensive " urbanized land".

Third, Chinese local governments aution those "urbanized land" at higher price and earn huge "land-granting fee".but such "land-granting fee" can be used only as the further development of urban areas.So,"land-granting fee" is not normal government revenue.

Fourth, Chinese local governments buy more "un-urbanized land" at cheap price with acquired huge "land-granting fee", then turn the cheap "un-urbanized land" to expensive "unbanized land" by building modern infrastructures there. Finally, Chinese local government can acquire more "land-granting fee".

so,the above 4 steps constitute of a repeatable loop. By such a loop, Chinese local government can continue to urbanize China rapidly.


Thus, in theory,as long as the "urbanized land" can be sold,the loop can be continue and Chinese local governments can keep on acquiring huge "land-granting fee".

This is not sustainable. You may have plenty of land, but there should be enough buyers for the urbanized land.

Also land granting fee is just sale of assets. You have a name for it. That's all.

I read Armand's post in J-20 thread and also a youtube video backing it up. Buildings and shops are empty even in city centers.

If you take loan, develop land and sell it at a higher price it is fine. But if you take loan, develop land and cannot sell it, then that becomes a NPL. Also, the loss is not recovered from businesses but from taxpayers paid by the center.

If this goes on, then there is bound to be a real estate bubble.

 

[badguy2000]

This is not sustainable. You may have plenty of land, but there should be enough buyers for the urbanized land.

Also land granting fee is just sale of assets. You have a name for it. That's all.

I read Armand's post in J-20 thread and also a youtube video backing it up. Buildings and shops are empty even in city centers.

If you take loan, develop land and sell it at a higher price it is fine. But if you take loan, develop land and cannot sell it, then that becomes a NPL. Also, the loss is not recovered from businesses but from taxpayers paid by the center.

If this goes on, then there is bound to be a real estate bubble.

Armand's post is just a extreme example and can not reflect all.

According to my expericence, the mode indeed effectively stimulated the rapidly urbanization of CHina.

It has worked for nearly one decade and I think that it can work for another decade at least until 2020
After all , only about 50% of Chinese are urban population. Only when 70+% of Chinese were to live in urban area and the immigration to urban area were to shrink,would "land-grantee fee" become unsustainable and shrink.

Of course, the huge "land-granting fee" indeed increases much the cost of house-price and stimulate real-asset bubbles . and in a long run, "land-granting fee" will shrink when urbanization in China is finished. so, , CHinese government now is considering to collect house-duty and replace "land-granting fee" with house-duty gradually.

 

[amoy]

BG, I saw Ganzhou Bank was opening a branch in my city, to my surprise. "Ganzhou Bank" sounds but a very local one confined to Ganzhou but is it ratified to expand nationwide?

Isn't it one of causes that local governments (provincial) are not allowed to issue bonds to fund their projects thus they (governments) have to create "special purpose vehicles" to loan from banks? What if those "long-term" infrastructures don't generate a return on investments?

 

[badguy2000]

BG, I saw Ganzhou Bank was opening a branch in my city, to my surprise. "Ganzhou Bank" sounds but a very local one confined to Ganzhou but is it ratified to expand nationwide?

Isn't it one of causes that local governments (provincial) are not allowed to issue bonds to fund their projects thus they (governments) have to create "special purpose vehicles" to loan from banks? What if those "long-term" infrastructures don't generate a return on investments?

are you in Xiamen?

well,frankly speaking, according to my experience, the rapid urbanziation provides enough demand for infrastructures and houses in cities.
the rocket of house price is just one indication how much CHina is lack of infrastructures.

until urbanization is finished compeltely, will there not be redundant infrastructure construction as a whole.

it is a unnecessary worry "those long-term infrastructures don't generate a return on investments" .