Bear View IV - Asian Contagion
Jim Jubak at MSN comments on a subject dear to our heart, Chinese Banking problems and how the next Great Depression could begin.
We believe that higher global interest rates, higher energy costs and the impending consumer pullback and economic slowdown i.e. a cold, will give China a flu that will spread globally.
Key Quotes: Local banks follow their own self-interest and that of local party leaders. They're ignoring Beijing's orders and continue to lend at a pace 70% faster than last year.
In April, China's central bank raised one-year interest rates by 0.27 percentage points to 5.85%. That was the bank's first rate hike in 18 months and it's not likely to be the last.
In the first quarter. Money supply (M2) grew at an annual rate of 18%. China clearly has a bad-loan problem as a result, but no one knows how big the problem is. Government figures are a joke.
In the last lending cycle, 40% of the increase in loans went bad, according to the Institute of International Economics in Washington. That organization estimates that a third of the increase could go bad in the current cycle.
Fitch Ratings, breaks down the problem this way. China's banking system has a total of $700 billion in bad debt, a number that covers a broader range of debt than the government's official $164 billion.
Fitch projects that this $700 billion in bad debt would produce roughly $260 billion in actual losses. Chinese banks have about $40 billion in loan-loss reserves, so $220 billion of the projected losses is unfunded at present. That $220 billion is about 33% larger than the total capital of China's banks.
If China's banks are looking at $164 billion to $700 billion in nonperforming loans in good times, what would the numbers look like if the economy slowed?
A slowdown could increase nonperforming loans by four or five times in a worst-case estimate. That would be equal to about 40% of China's FALSELY advertised GDP. More to come in Part V
We believe that higher global interest rates, higher energy costs and the impending consumer pullback and economic slowdown i.e. a cold, will give China a flu that will spread globally.
Key Quotes: Local banks follow their own self-interest and that of local party leaders. They're ignoring Beijing's orders and continue to lend at a pace 70% faster than last year.
In April, China's central bank raised one-year interest rates by 0.27 percentage points to 5.85%. That was the bank's first rate hike in 18 months and it's not likely to be the last.
In the first quarter. Money supply (M2) grew at an annual rate of 18%. China clearly has a bad-loan problem as a result, but no one knows how big the problem is. Government figures are a joke.
In the last lending cycle, 40% of the increase in loans went bad, according to the Institute of International Economics in Washington. That organization estimates that a third of the increase could go bad in the current cycle.
Fitch Ratings, breaks down the problem this way. China's banking system has a total of $700 billion in bad debt, a number that covers a broader range of debt than the government's official $164 billion.
Fitch projects that this $700 billion in bad debt would produce roughly $260 billion in actual losses. Chinese banks have about $40 billion in loan-loss reserves, so $220 billion of the projected losses is unfunded at present. That $220 billion is about 33% larger than the total capital of China's banks.
If China's banks are looking at $164 billion to $700 billion in nonperforming loans in good times, what would the numbers look like if the economy slowed?
A slowdown could increase nonperforming loans by four or five times in a worst-case estimate. That would be equal to about 40% of China's FALSELY advertised GDP. More to come in Part V
Comments
Thanks for the article link!