Posted on 07/23/2022 5:44:48 PM PDT by datura
The state of banks in China dominates concerns about the economy and global growth. With pictures of angry crowds outside banks and tanks on the street in one city to quell discontent about being unable to withdraw funds, it bears asking what the true state of Chinese banks is.
Officially, Chinese banks are in fine shape. Nonperforming loans are low and are disposed of in a controlled manner. Banks remain comfortably within their regulatory limits of loan growth, and deposits continue to rise. However, as with all things China, a look behind the official statistics gives cause for concern.
First, loan classifications in China fail to capture the true level of risk of defaults. Loan classification in China is notoriously pliable, so Chinese banks can set standards for loans being classified as nonperforming that would not pass regulatory scrutiny in other countries, a fact they openly acknowledge.
While an interest payment in most jurisdictions that was overdue by 90 days would change the classification, some Chinese banks have said they do not change the classification of the loan to doubtful until “the operations of the borrower have been suspended for at least half a year.” The cessation of a company’s operations would make any outstanding loans dubious.
Second, Chinese banks are highly leveraged and short on capital. The weighted reserve rate for all banks in China is now just 8.4 percent of all capital. This is a drop from over 21 percent a decade ago. This means Chinese banks have significantly less capital to absorb losses and less cash on hand for withdrawal by depositors. These reserve figures are the official numbers, so even small changes to the bad loan numbers, an issue as just noted is highly suspect, can rapidly make that 8.4 percent even smaller.
Third, banks are facing a wave of stressed borrowers right as their capital is at historic lows, and they have been fudging the data for some time. Local governments have seen revenue plunge from lower economic activity from COVID-19 and real estate. The property sector, which is responsible for around 30 percent of GDP, is under enormous pressure, with buyers and developers alike feeling the pressure. In other words, right when banks need that capital most, they have the lowest capital levels in years.
The bad news is that the choices available to Beijing are limited due to the years of pushing rapid expansion in fiscal and monetary policy to support growth. Recapitalizing the banks would require vast sums of money that would require significant inflation or devaluation of the Chinese yuan against the U.S. dollar. Due to the over-leveraged consumer and high real estate prices, consumers are in no mood to borrow more, in effect rescuing local governments and developers.
Nor is the international environment any more forgiving. For many years, China benefited from a synchronized business cycle with the United States. However, the United States is now rapidly tightening due to nearly double-digit inflation, as China is seeking to ease financial pressures on a rapidly slowing economy.
As interest rates converge between China and the United States, that places greater pressure on capital fleeing the country. Chinese banks have already been tightening limits on outward U.S. dollar transfers, but this has done little to stop leaks in capital flows out of China.
The cold reality is a major reset of Chinese asset prices, and bank capital is needed to return to a more sustainable path. Real estate in major Chinese cities is wildly more expensive relative to income, and the days of the Chinese saver are history. Now the reality is that Chinese consumers and corporates are some of the most indebted in the world, and growth is decelerating rapidly. There is no simple way out. The days of outgrowing problems are gone.
Elaborate with specifics.
Specifics in which regard? Their entire economic system is built upon the reports of bureaucrats from the lowest to highest levels - whose entire future depends on showing positive growth, regardless of the reality on the ground.
Their housing sector - 30% of their GDP - has been the driving force of their economy by using huge amounts of steel, concrete, glass, etc - but now people are finished buying apartments in advance, and those units are never finished. Over 91 million mortgages have stopped making payments to the lenders in a growing boycott.
This has made the developers stop paying their contractors and suppliers. It’s cascading now.
Evergrande was just the beginning, and defaults are growing each week now. State Owned Enterprises depend on the real estate market to repay their loans, and municipalities depend upon those sales and taxes.
Blog/Economics
Posted Jul 22, 2022 by Martin Armstrong
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For the first time since 2010, China holds less than $1 trillion in US debt. China held $980.8 billion in US debt in May, a $23 billion decline from April and a $100 billion decline from a year prior. In fact, the US Treasury Department noted that China has been reducing its holdings for the past six consecutive months.
Japan is now the top holder of US debt, reaching $1.212 trillion in May, marking a slight increase from $1.218 trillion in April. Total foreign holdings declined by $7.42 trillion in May as those who see what is coming want no part in government debt.
This did not go well for Japan in the past. You see, the USD remains the last safe haven among currencies. Rates are set to rise, other currencies are set to decline, and the countries left holding US debt will be forced to pay much more than intended. No one seems to understand this simple staple of FOREX.
China unloading US debt could indicate growing geopolitical tensions, which our models indicate could break out in 2023.
It’s curious how when the Japanese ran out technology they could easily rip off, their growth ground to a halt. I blame their first-to-file patent system (vs the first-to-invent system stateside). A big part of the problem for innovation in Japan is that big corporations file any number of junk patents that prevent inventors from capitalizing on things they’ve built that actually work, because Sony and Panasonic (to name two megacorps) beat them to the punch with broad and vague patents for non-existent products. Nonetheless, by that point, their output per capita had caught up to the US.
Meanwhile, China hasn’t caught up to the US, but its growth appears to have flatlined. In addition to a similar patent system problem with Japan, China also suffers from the fact that patent enforcement there depends on how powerful your political patrons are.
Then there’s the fact that Xi Jinping is like an apex predator that takes random swipes at various businesses and business sectors just to show others who’s boss. In one fell swoop, he zeroed out $100b worth of investor capital by allowing the online education sector to continue operating only as long as it registered no profits whatsoever. He prevented the premier Chinese ride-sharing company, Didi, from having its app listed on Chinese app stores, which meant many users could not download its app to their phones so they could book rides to their destinations. And ever since he came to power, Xi has systematically cut phone rates by edict, thereby requiring investors in Chinese telcos to subsidize Chinese users.
With all the investor-unfriendly moves, it’s not particularly surprising that most investment has gone into a sector he hasn’t persecuted - real estate. But the Eye of Sauron never rests - he has now decided that he can fix real estate by zapping the tycoons who have been trying to surf a tidal wave of hot money driven there by Xi’s relentless meddling in other sectors of the economy. Predictably, real estate is in the process of melting down. Xi Jinping makes Joe Biden look like Einstein by comparison.
[I found the above interesting. Is Japan buying US Debt from China at a discount?]
Martin Armstrong is a crank and a convicted felon from his days as a Ponzi scheme operator. I have nothing against him personally, but he tends to surf the web for whatever ideological currents seem to have a good number of adherents and latch on to those currents to get people to buy his wares:
https://www.armstrongeconomics.com/shop/
The move out of Treasuries by sellers is a bet that interest rates are moving up. Since bonds respond to rate hikes by going down in price, that can be a prudent move on the part of the sellers. The buyers are betting that rate hikes will overshoot by cratering economic growth, upon which the Fed will respond by rapidly cutting rates again below where they are currently, thereby delivering a capital gain for bond investors gutsy enough to buy when everyone else is selling. For instance, 30-year Treasuries peaked at a yield of over 14% in the early 80’s, and then plunged back below 10% within several years. Anyone who bought near peak yield and held on made a ton of money. (For instance, average annual stock market returns since 1980 are only around 8%).
1/2 the world’s smokers live in China. What happens when those 30 something year-old smokers become 55 year-olds with emphysema?
Most farmers in China are in their 70s. How will China feed itself when all the farmers die off?
Due to the one child policy (Now three child policy) China has a demographic time bomb that hits in about 20-25 years. The population is going to collapse down to about 500 million by (I think) 2085 if they do not do something now. But the younger generations do not want big families.
Let me get this straight. The Commies went all fascist and tried a little capitalism. And they screwed it up. Not really. It was a massive grift. A Ponzi scheme that ran out of money. Because the CCP is thoroughly corrupt from the lowly street cleaner to the might Xi.
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