Tuesday, October 11, 2011

Economic reality begins to bite in China

I've written before about China's economic woes, and warned that when things began to come unraveled over there, it would hit the USA hard as well. It looks like that time is fast approaching - if it isn't already here. The Telegraph reports:

Bail-outs are coming thick and fast in China. In less than a week the authorities have had to step in to prop up the banks, rescue the insolvent railway system and save the near bankrupt city of Wenzhou from a spectacular debt crash.

It is proving harder than expected for the central bank to manage a calibrated "soft-landing" after letting rip with credit to counter the Great Recession. The loan spree raised credit from 100pc to almost 200pc of GDP (on IMF estimates), including off-books trusts, letters of credit and sub-radar loans from Hong Kong.

The 30pc annual pace of loan growth is unprecedented in any major country in modern history. It is double the pace of America's housing boom and Japan's Nikkei bubble in the late 1980s. It may match US loan growth in the late 1920s.

The Communist Party is now struggling to cope with the fall-out. On Monday, the state investment fund Central Huijin began buying stakes in China's four top banks to restore confidence and halt the slide in share prices.

The relief rally ignited bank shares on Tuesday. Agricultural Bank of China surged 13pc in Hong Kong. Shanghai's bourse jumped 4pc but is still down 60pc from its peak in late 2008.

China's finance ministry is quietly intervening to underwrite China's railway system. This behemoth is drowning with $300bn of debts after breakneck expansion, is in arrears on $25bn of debts to its two largest suppliers and has run out of money to pay workers on the Lanzhou-Chonqing rail project.

The ministry has offered a 50pc tax break on railway debt to be auctioned on Wednesday. This is a signal that Beijing will stand behind the system. It is intended to lure back investors following the high-speed rail crash in July.

Meanwhile, Bejing is negotiating a $15bn bail-out for the enterprise hub of Wenzhou south of Shanghai, where panic has set off a credit crunch for small business and builders. China's press has been riveted by tales of debtors hiding in the hills to evade creditors.

Roughly 60pc of the region's loans come from non-bank lending beyond control, some of it Ponzi finance. "It's a tight financial network that interweaves lenders and borrowers collectively, often to their mutual benefit and sometimes to their terrible loss," said Caixin Magazine.

"If only a few debt-ridden companies collapse, the financial trouble can ripple through the entire credit-connected community. The domino-effect started to endanger the entire system in July."

While Wenzhou is small enough to contain, it may be an early warning of toxic debts in countless other cities.

There's more at the link.

Reading this report in conjunction with all the other economic news I've posted over the past few years, and in the light of economist Nouriel Roubini's statement today that "The question is not whether or if there is going to be a double dip [recession], but whether it's going to be mild or severe with another financial crisis", doesn't give me any comfort at all.

Keep your powder dry, folks.


1 comment:

trailbee said...

I think this is really interesting. Russia's Communism ran on military wheels and their population was one of neediness and neglect. When it was 'over the top' it fell apart.
Chinese Communism has/had no policies in place to cope with the onslaught of prosperity brought about by unintentional capitalism, which they could not admit was happening. What to do? What an ironic situation to be in. I still watch China's Ghost Cities at times, but will understand if the Chinese do not brag about this one.