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China's Debt Problems Rival the West

Interest-Rates / China Economy Aug 28, 2011 - 02:27 AM GMT

By: Justice_Litle

Interest-Rates

Best Financial Markets Analysis ArticleThough the focus has been on the U.S. and Europe, China too has debt problems to contend with.

"If you look at the accounting, I don't see how anyone could put a penny there."


So says Rajiv Jain, a top money manager with Vontobel Asset Management, of Chinese banks.

Earlier this month, Bloomberg reports, valuation on Chinese banks fell to the lowest levels since October 2008. But Jain, who oversees some of the best-performing mutual funds of 2011, says the shares "aren't cheap enough to buy" because lenders' leverage is too high.

"We have not owned a Chinese bank, and I don't see owning one any time soon... there's no margin of safety for us."

As the West struggles with huge debt loads and the strain of pending crisis, Asia is seen as immune. China, in particular, is portrayed as the rich dragon sitting on a mountain of savings.

But China has big debt problems of its own. They start, but do not end, with the banks.

Part of the China miracle is Beijing's famed ability to "get things done." This comes from a system of command and control, in which authorities tell the SOEs (state-owned enterprises) what to do -- and tell the banks how much to lend.

In order to keep China booming through the global downturn, Beijing ordered the banks to lend heavily. And lend they did, racking up all kinds of potential bad debts. That is what happens when money is pushed out the door, with a measuring emphasis on quantity, rather than quality, of loans.

Just what kind of numbers are we talking about here?

"Chinese banks expanded credit at a record pace in 2009 and 2010," Bloomberg notes, "making more than 17.5 trillion yuan ($2.7 trillion) of new loans as the government moved to offset a collapse in exports..."

That is no small sum, $2.7 trillion, even for the mighty China. The ratings agency Moody's has predicted that non-performing loans, or NPLs, could rise as high as 18% of the total in a "stress" scenario.

At 18% of $2.7 trillion, that is $486 billion worth of bad loans -- or more if Moody's estimate is conservative. In the classic tradition of Ponzi finance, many local government borrowers don't have the cash flow to service their debts. Standard & Poor's sees "as much as 30 percent" of local lending going bad.

"We feel that the non-performing loans are going to be shockingly high," says Jain.

And the debt hits just keep on coming. "Beijing's state-owned infrastructure companies face a record amount of bonds maturing next year," Bloomberg reports, "as China's capital city pays the bills for the $70 billion 2008 Olympic Games."

But does all this really matter, one might ask, when China has such huge capital reserves? Can't Beijing just write a check to cover all that bad debt?

It isn't quite that easy. For the mandarins who guide and direct China's top-down economy, an iron fist is not the same thing as local control. While orders can be issued from the top, there is often little hand in what kind of results flow through to the bottom.

Even if the banks themselves can be shored up with capital injections, the bad businesses surviving on Ponzi finance must eventually be allowed to fail. They cannot be propped up indefinitely -- such an effort would drain even China's savings.

And all of the above makes Chinese citizens angry, which in turn stirs potential for unrest. There is a growing awareness in China of shoddy financial decisions and their consequences. When the government throws money down a rat hole in the form of bad investments, China's citizens increasingly see it as their own savings being wasted. (And they are right.)

Says Arthur Kroeber of GaveKal Dragonomics in Beijing: "The Chinese government hasn't bothered to create real financial markets, where you have the infrastructure that rewards good behavior and punishes bad behavior."

One could argue Western markets haven't mastered that either -- the punishing bad behavior part. Yet the broader point is that China's financial situation is not necessarily that much better than America's (or Europe's). Much of the debt is simply hidden away, tucked cozily into "off the books" arrangements with local government entities.

Some even argue that, were China's hidden-debt-to-GDP ratio properly calculated, it would reveal the dragon to be not only in the same boat as Uncle Sam, but worse off than Greece!

We don't know China's true debt-to-GDP ratio, of course, and the dragon isn't telling. (The official number is potentially four or five times too low.) We also don't know how long the non-performing loans (NPLs) can keep getting extended or rolled over, creating a Madoff-like appearance of stability as stakes rise with each round.

There is reason to be wary: Along with China's proliferation of ghost cities, empty highways and dust-ridden shopping malls, there is a multitrillion-dollar mountain of hidden debt to contend with... big enough to create an avalanche of problems that could rival those in the West.

Publisher's Note: China's growth was a lie, a global scam to rip off the world. The whole thing is about to collapse around them -- and it's going to take your retirement with it. Unless you act immediately. Get all the details here.

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Source :http://www.taipanpublishinggroup.com/tpg/taipan-daily/taipan-daily-082611.html

By Justice Litle
http://www.taipanpublishinggroup.com/

Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader and Managing Editor to the free investing and trading e-letter Taipan Daily. Justice began his career by pursuing a Ph.D. in literature and philosophy at Oxford University in England, and continued his education at Pulacki University in Olomouc, Czech Republic, and Macquarie University in Sydney, Australia.

Aside from his career in the financial industry, Justice enjoys playing chess and poker; he enjoys scuba diving, snowboarding, hiking and traveling. The Cliffs of Moher in Ireland and Fox Glacier in New Zealand are two of his favorite places in the world, especially for hiking. What he loves most about traveling is the scenery and the friendly locals.

Copyright © 2011, Taipan Publishing Group

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