China debt

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. Continue reading »

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. Continue reading »

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. Continue reading »

A manufacturer of construction materials has become the first Chinese company to default on a domestic junk bond, a state-owned Chinese newspaper said on Tuesday, compounding investor concerns over which mainland issuers could be next to miss debt repayment obligations.

Xuzhou Zhongsen Tonghao, based in the prosperous but highly indebted province of Jiangsu, was unable to meet interest payments on Rmb180m (US$29m) in bonds it sold to domestic investors last year, according to the 21st Century Business Herald, a state-owned newspaper. The missed interest payment was estimated at Rmb18m, given the 10 per cent coupon on the bond, and took place last Friday. Continue reading »

By Diana Choyleva, Lombard Street Research

China’s first corporate bond default in recent history is only the first step on a difficult road of reform. Much like the removal of the floor under the bank lending rate last year, allowing the default of Chaori Solar Energy Science and Technology Co. was the easy part.

It has been dubbed China’s ‘Bear Stearns moment’ by some and its ‘Lehman moment’ by others. It is likely to be neither. Continue reading »

Analysts from Bank of America Merrill Lynch think that China will experience its “Bear Stearns moment” on Friday, when the country will probably see as its first ever bond default.

That is a bold, attention-seeking call that is also patently ridiculous. Continue reading »

A Chinese corporate bond was heading on Tuesday for default, potentially puncturing some of the optimism that has galvanised a booming $12tn corporate debt market.

Shanghai Chaori Solar Energy Science & Technology Co.,Ltd, a Chinese maker of solar cells, announced late on Tuesday that it will not be able to repay the Rmb 89.8m interest on a Rmb1bn bond issued on March 7th 2012. Continue reading »

You can bring a horse to water. But can you stop it from drinking (too much)? In the upcoming year of the horse, China’s leaders need to figure out exactly that, as its local governments thirst for debt threatens to derail the economy. Will they succeed?

Liu Mingkang, former chairman of China’s Banking Regulatory Commission (pictured), left no doubt about the government’s intention to stop the flood of lending: “The signal is clear cut,” he told beyondbrics in an exclusive interview. “The torrent [of local government debt] is becoming quite limited.” Continue reading »

What’s the big deal with GDP anyway? While many economists and policy makers worldwide have recognised that there’s more to life than gross domestic product, it still remains the primary yardstick for measuring economic success.

But Chinese policy makers have decided that it’s not the be-all and end-all, certainly as far as local governments are concerned. This week, a department of the Chinese central committee announced that the success or failure of local authorities will be based on broader criteria than just plain growth. Good news for environmentalists and other groups – and with a greater focus on debt, investors should take note too. Continue reading »

Investors can’t get enough of Cinda’s Hong Kong IPO. On Monday, day one of order taking for the Chinese bad bank, would-be shareholders put in bids of more than $10bn for only $1bn of product. And that’s before retail investors get their chance.

While it may offer a unique (for now) way of accessing China’s economic underbelly, there are some reasons why investors might want to think twice. Here are the main risks facing Cinda. Continue reading »

Building big in Sichuan

While Beijing is trying to transform China’s economy from investment driven to consumption driven, local governments want to keep things going the good old way.

The government of Sichuan, a southwestern province known for its spicy food, spiced up its investment in a high-profile press conference on October 22. The Sichuan government official website said that Sichuan would invest Rmb4.26tn ($700bn) on 2,336 projects in 2013-14, including Rmb1.48tn ($243bn) on infrastructure. It’s not alone, either. Continue reading »

There has been a lot of talk about the ‘great rotation’ from bonds to stocks but are we about to see one from east to west, from China to the US? Chris Watling of Longview Economics talks to the FT’s John Authers about green shoots in the US – and worries in China.

A top Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash, reports Simon Rabinovitch.

Zhang Ke, head of leading Chinese accounting firm ShineWing, said he had all but stopped signing off on bond sales by local governments as a result of his concerns. Continue reading »

Could China in 2013 be heading towards a financial crisis similar to the US in 2008 and Japan in 1989? It’s the billion dollar question of the day, but for now the optimists have been able to outshout the doom-mongers by pointing to China’s much lower debt to GDP ratios than those that characterised the US and Japan before it all went pop.

Then along come analysts from Nomura with some unsettling numbers. Continue reading »

It’s well known that loose credit has played a big role in driving Chinese growth, but the rest of Asia could have a debt problem too. So says HSBC’s Frederic Neumann, who warns that bank credit to GDP in Asia (excluding Japan) is now running at levels higher than in the 1997-8 Asian financial crisis. Continue reading »