- Netflix to pay Comcast for smoother streaming - WSJ
- Seen on an ATM in Western Australia - ZeroHedge
- Shares fall on China property market concerns - WSJ
- Bridging the fiscal chasm - Economist
- Draghi's data jigsaw takes shape as ECB readies showdown - Bloomberg
Before I offer my latest macro missive, let's take a quick look at how the markets are shaping up. Overnight trading in Asia saw declines led by Shanghai's shedding of 2.20%; Hong Kong ended 0.80% lower, and the Nikkei finished 0.19% lower. European markets are mixed this morning, with the FTSE down 0.09% and the DAX posting a tepid 0.10% advance. Aside from mainland China, we open this week with mostly a mixed bag.
The weakness in China was a result of concerns over lending to property developers. The Oriental Morning Post on Friday got their hands on an internal document from Industrial Bank Co. (see WSJ above) saying that the bank had stopped lending to the property sector because of risk.
Are Chinese banks dancing on a volcano?
A few weeks ago, the world learned of a bailout of one of China's Wealth Management Products (WMPs - think mortgage-backed securities in the US, circa 2007). The WMP was named "Credit Equals Gold No. 1" and contained within it ~$500m worth of toxic assets in the form of unrecoverable debts from a corrupt - and now bankrupt - coal mine company. Investors were made nearly whole after the Chinese government stepped in to bail the product out. This is being seen as China's internal "Bear Stearns moment."
A lot of China's astounding growth has come from domestic infrastructure investments. The government forced banks (which are mostly government-ran) to lend to these projects, even if they posed the risk of generating a negative real rate of return on investment. It is estimated that China's banking sector has grown by $14-15t (that's "t" for "trillion") since 2008 to a current level of ~$24t. That is a massive expansion of credit.
China has massive foreign currency reserves and will no doubt try to buy off the crisis (they already "bought off" the aforementioned WMP); though it seems likely the economic situation will continue to deteriorate. Chinese banks' bad loans increased for the ninth straight quarter to the highest level since the 2008 crisis, highlighting pressure on asset quality and profit growth as their economy slows.
Bloomberg reports: "Non-performing loans rose by 28.5 billion yuan in the last quarter of 2013 to 592.1 billion yuan, the highest since September 2008..."
These bad loans only account for roughly 1 percent of total lending, but as the saying goes, "a rolling loan gathers no loss" - it is likely that many loans are waiting to be accounted for as "bad." It is safe to expect that the Chinese will throw good money after bad loans in order to buy time, which will only increase the level of malinvestment and exacerbate the depths of the coming reckoning.
I would watch credit quality in China very closely.
Heads, China has problems. Tails, China has problems.
No comments:
Post a Comment