China debt

Arguably the most revealing English translation of the French verb ‘étonner’ – at least in the context of Napoleon’s famous quip about China – is ‘to astonish’. “Ici repose un géant endormi, laissez le dormir, car quand il s’éveillera, il étonnera le monde” so the Corsican is said to have noted. “Here lies a sleeping giant, let him sleep, for when he wakes, he will astonish the world.”

Some 200 years later, that giant has awoken and Napoleon was right: China is now astonishing the world. In the past three decades, it has roused itself from a slumber to a state of almost unimaginable vibrancy. The roll-call of economic trophies it now claims is daunting: largest exporter, importer, foreign exchange reserve owner, commodity consumer, luxury goods market, most car sales, most internet users, even (in purchasing power parity terms) biggest economy. Read more

The ever ingenious Chinese financial system has developed a new kind of shadow bank – insurance companies.

China’s $586bn stimulus package in 2009 caused a flurry of lending through the country’s financial arteries. Some of this money ended up leaking out of the banks into unofficial channels, including the country’s state banks and the giant provincially-owned pseudo banks called Trust Companies. By the end of 2014, these off-balance sheet loans accounted for 18 per cent of all financing, up from less than 2 per cent a decade earlier. Read more

As the Chinese economy posts its slowest growth in six years, major reforms to China’s state-owned enterprises are now in the final planning stages. The Xi Jinping administration has pledged to overhaul and consolidate the state-owned economy to tackle widespread inefficiency and corruption.

A wave of mega-mergers among state-owned firms has already been announced in railways, nuclear power and other industries. Consolidation may be easier politically than market reforms, but it’s not the right way forward. China’s crown jewel firms don’t need to be bigger; they need to be better. Read more

By David Mann of Standard Chartered

Much of the negativity about world growth prospects at the moment seems to stem from the absence of a credit boom in any major market and worries over the consequences of higher US interest rates for the first time since 2006.

The lack of a credit boom means that growth is more subdued than it was in the run-up to the global financial crisis.

In particular, there are fears about China’s growth prospects, given the recent bad news concerning weak credit demand, high real interest rates and tight liquidity. However, we see three reasons for at least some optimism. Read more

The second cut in China’s interest rates in three months reveals key elements in Beijing’s thinking as it tries to reconcile an economic policy agenda beset with conflicting priorities, analysts said on Monday.

The task before China requires some delicate manoeuvres. It aims to wean the country off an extraordinary debt binge (see Martin Wolf ) while keeping GDP growth fairly robust. It hopes to combat disinflationary pressures while preventing the renminbi from sliding too sharply against the US dollar. It wants to curb a dangerous slump in industrial profits without resorting to another round of investment pump-priming. It needs to keep domestic liquidity levels buoyant in spite of a surge in capital flight.  Read more

By Joseph Dobbs, European Leadership Network

Russian aggression towards Ukraine this past year has seen Vladimir Putin, the Russian president, lambasted by Western leaders. China has desisted from such criticism and instead signed two major gas deals worth hundreds of billions of dollars, co-operated in establishing a new development bank, and conducted joint military exercises. For some, Russia and China’s co-operation demonstrates their potential to challenge the global order. But in reality Russia’s pivot east faces too many hurdles to represent a viable alternative to working with the West.

Russia and China have much in common. Both states are increasingly nationalistic and share a common perceived threat of Western containment. In Russia’s case this threat comes primarily from the potential expansion of the North Atlantic Treaty Organisation (Nato). China’s perception of US containment strategies derives mainly from the American military presence in East Asia. Leaders in Moscow and Beijing have both watched with unease as the West supported the Arab Spring and the so-called “colour revolutions” that rocked the likes of Georgia, Ukraine and Kyrgyzstan. Read more

By Gabriel Sterne and Alessandro Theiss, Oxford Economics

If there was a financial crisis in China, the government could take a big hit, transferring a huge chunk of bad debts onto its balance sheet. But this remedy would have a big impact on the domestic and global economy.

Overall debt (public, private and financial) has skyrocketed in recent years, rising from 176 per cent of GDP in 2007, to 258 per cent of GDP by mid-2014. The debt binge may be fuelling a time bomb in the property market. Read more

Zhou Xiaochan, China's central bank governorClearly, China’s interest rate cut on Friday was motivated by a desire to manage a flagging growth story. But the announcement also revealed a few sub-plots, which together may say more about Beijing’s mindset than the dominant narrative.

The first point, several analysts said, is that Beijing’s monetary easing may well have further to run, following the decision by the People’s Bank of China (PBoC) to cut its benchmark lending rate by 0.4 percentage points to 5.6 per cent, while cutting its deposit rate by 0.25 per cent to 2.75 per cent. Read more

By Alastair Campbell and W. John Hoffmann, Exceptional Resources Group

“There is no difference between reform and anti-corruption: both must be implemented within the framework of law”.

So said Chinese leader Xi Jinping, and with the end of a high level Communist Party meeting last month, the significance of Xi’s “Rule of Law” campaign has become crystal clear. It is a key tool in his attempt to restructure the framework of Party political power and decision-making via the four new Party central leading groups which he chairs. Read more

“If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.”

For about two weeks in late October, it seemed as if these optimistic words from Calvin Coolidge, the former US president, might have encapsulated the mindset of emerging market (EM) investors.

But the late October rally in EM financial assets has now stalled. Investors are relinquishing hopes that market troubles may turn out to be mere phantoms and focusing again on the very real problems coming their way. Four of the most intractable are set out below. Read more

By Eswar Prasad, Karim Foda, and Abhinav Rangarajan

China is making steady progress on its path to making the renminbi an international currency, as the FT writes in a Special Report, The Future of the Renminbi, published today.

See here for an Interactive graphic that traces the renminbi’s progress since 2000.

China continues to gradually open up its capital account, make offshore renminbi liquidity more easily available, and sign up more renminbi trading centers (London and Frankfurt most recently). To become a reserve currency, China also needs to let the renminbi’s value be market-determined rather than being tightly managed relative to the US dollar.

On March 16th of this year, China took another step towards freeing up its currency. The daily trading band around the renminbi’s central value relative to the U.S. dollar was widened from 1 percent to 2 per cent in either direction. The reasonable expectation had been that this would lead to faster appreciation of the currency and more volatility. Instead, the opposite happened. Was the shift to a wider trading band just a head fake? Read more

Official statements on bad loans in Chinese banks come with a health warning: analysts widely believe they understate the real level of delinquency by a wide – though unknowable – margin.

Nevertheless, official statistics can be helpful in assessing whether the problem is deepening or alleviating. In that context, an analysis published on Thursday by EY, the accounting firm, shows stress levels rising rapidly among China’s top banks. Read more

A closely-watched indicator of economic activity in China is showing an unexpectedly robust reading for September, according to an announcement on Tuesday. But is a real growth rebound underway, following several signs of a slowdown in the third quarter so far?

Hong Kong stock market investors appeared to reserve judgement, allowing the Hang Seng index to slip 0.49 per cent, or 118 points on Tuesday to 23,837. Economists and other survey-based indicators of Chinese economic activity reinforced the skepticism. Read more

China’s leading credit rating agency will soon begin to provide English language ratings for local Chinese debt in the latest sign of a growing desire on the part of international investors to access the country’s highly restricted domestic debt markets.

“Dagong is making preparations to release ratings for onshore debt in English early next year,” the company’s chairman, Guan Jianzhong, told beyondbrics. “There are more international investors looking at Chinese debt.” Read more

By Andrew Colquhoun, Fitch Ratings

Does China invest too much? The country has been investing about 48 per cent of its GDP annually since 2010, which is unprecedented for any decent-sized economy, post-war. This investment is funded by a stock of leverage that will reach about 230 per cent of GDP in 2014 on Fitch’s estimate. Everyone has heard about the ghost towns and empty airports, leading some analysts to conclude China must be heading for a reckoning.

But you do not have to look far for evidence that China remains an underdeveloped country. Its rail network is only 13 per cent as extensive as Japan’s and only 64 per cent of its roads are paved, according to the World Bank. Almost exactly four years ago, one of the country’s main arteries, Highway 110, saw a 60-mile, 10-day traffic jam. Read more

By Gordon French, HSBC

China has been the growth story of the past three decades. It has also been largely out of reach for portfolio investors. That is about to change.

Shanghai-Hong Kong Stock Connect opens a new chapter in China’s financial integration with the world, and will in time reshape the dynamics of global investment flows.

Expected to launch in October, Stock Connect will for the first time allow mainland Chinese citizens to invest directly in foreign equities, and give global investors direct access to China’s stock market. Read more

By Jukka Pihlman, Standard Chartered

Adopted at pace by central banks around the world, China’s renminbi is now seen by many as a de facto reserve currency – and well on the way to becoming an official one.

Central banks have caught the renminbi fever, and are showing strong interest in investing part of their foreign-currency reserves in the Chinese currency, with more than 50 central banks now actively doing so either onshore or offshore.

Uptake is strongest in Asia, Africa and South America – regions with fast-growing trade and investment links with China – but even in Europe central banks are busy allocating reserves to the renminbi. Read more

By Andrew Collier, Orient Capital Research

Beijing’s desire to pump up the Chinese economy is leading it into dangerous territory.

Although China has piled on debt, the country has been relatively cautious about one of the big areas that led to the U.S. financial crisis: leverage. It was the slicing and dicing of mortgages into digestible bite-sized chunks called derivatives that was a key contributor to the U.S. financial meltdown in 2007. Once they unwound, they threatened the banking system itself.

Until recently, China has avoided complicated derivatives and other forms of leverage. However, desperate to keep the economy from slumping, the Chinese reluctance to wander down the leverage path seems to have faded. Read more

Andrew Collier, Orient Capital Research

A decade ago, when China was struggling to clean up its banking system, regulators pulled a rabbit out of a hat. They set up a series of “bad banks” – called Asset Management Companies (AMC) – and took Rmb 1.4tn ($125bn) of debt off the hands of the four State Banks in Beijing. It was a big success, leading to the listing of the “Big Four” banks in Hong Kong and a healthier financial system.

Now, they’re trying to pull the same trick again – this time across the country.

Regulators have quietly given approval for local governments to set up their own AMCs. As in Beijing ten years ago, these local AMCs would take non-performing loans (NPLs) from local banks, governments and other financial institutions and sell or restructure them. So far, four Provinces have signed on, but once the experiment gets rolling, it’s likely there will be one for each Province across China. Read more

By Andrew Collier, Orient Capital Research

What happens if China goes broke?

China’s Rmb4tn stimulus package in 2008 – and its ballooning lending – has raised fears of a financial collapse. Certainly, debt has exploded. The China Academy of Social Sciences (CASS) estimates that total government debt is now Rmb 27tn, or 53%, of GDP. Throw in corporate and household debt, and CASS estimates the total at Rmb 111.6tn ($18.3tn) at the end of 2012, or 215 per cent GDP.

Chinese economists are quick to point out that the country has plenty of money to pay off its debts and could easily avert a financial collapse. The government, they say, could function as lender of last resort. Read more