China Facing Full-blown Banking Crisis, World’s Top Financial Watchdog Warns

China has failed to curb excesses in its credit system and faces mounting risks of a full-blown banking crisis, according to early warning indicators released by the world’s top financial watchdog.
A key gauge of credit vulnerability is now three times over the danger threshold and has continued to deteriorate, despite pledges by Chinese premier Li Keqiang to wean the economy off debt-driven growth before it is too late.
The Bank for International Settlements warned in its quarterly report that China’s ‘credit to GDP gap’ has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.
Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring. The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences.
It is based on work the US economist Hyman Minsky and has proved to be the best single gauge of banking risk, although the final denouement can often take longer than assumed. Indicators for what would happen to debt service costs if interest rates rose 250 basis points are also well over the safety line.

This post was published at David Stockmans Contra Corner on September 19, 2016.

Red Capitalism Is Getting Redder – – Xi Takes More Control Of State Companies

Chinese President Xi Jinping is putting more of the ‘state’ in ‘state-owned enterprise.’
Carmaker FAW Car Co., fiber producer Sinoma Science & Technology Co. and miner Tibet Mineral Development Co. have recently modified their bylaws to give Xi’s Communist Party more oversight of management decisions. For example, company boards will now have an obligation to listen to internal party committees before making major decisions.
‘Communist Party officials are stepping up intervention in day-to-day operations of state-owned corporations,’ said Xu Baoli, a senior researcher with the State-owned Assets Supervision and Administration Commission, the government’s main SOE regulator. ‘There were cases in the past where the board would reject a proposal that had gone through the party. I doubt whether that will happen in the future.’
While tightening the Party’s grip on China’s $18 trillion state sector with one hand, Xi and Premier Li Keqiang are carrying out pledges for more market-oriented reforms with the other. Such ‘conflicting objectives’ may be at odds with increasing efficiency, according to Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. The ‘national interest is still being prioritized over business efficiency,’ Shen wrote in a report this week. ‘The board of directors of SOEs may not be able to make personnel or business decisions under the party’s leadership hierarchy.’
Recent steps to merge SOEs suggest an emphasis on strengthening and expanding the companies and may not sustainably boost their profitability, he wrote.

This post was published at David Stockmans Contra Corner by Bloomberg Business ‘ July 8, 2016.

China’s Economy Is Past The Point Of No Return

After a near-disastrous start to the year and a one-month recovery in March, the Chinese economy looks like it’s now headed in the wrong direction again. The first indications from April show the country was unable to sustain upward momentum.
Even before the first dreadful numbers for last month were released, Anne Stevenson-Yang of J Capital Research termed the uptick the ‘Dead Panda Bounce.’
The economy is essentially moribund as there is not much that can stop the ongoing slide. A contraction is certain, and a severe adjustment downward – in common parlance, a crash – looks likely.
At the moment, China appears healthy. The official National Bureau of Statistics reported that growth in the first calendar quarter of this year was 6.7 percent. That is just a smidgen off 6.9 percent, the figure for all of last year. Moreover, the quarterly result cleared the bottom of the range of Premier Li Keqiang’s growth target for this year, 6.5 percent.
The first-quarter 6.7 percent was too good to be true, however. And there are two reasons why we should be particularly alarmed.

This post was published at David Stockmans Contra Corner on May 16, 2016.

Miner Debts In China’s Main Coal Province Equal Its Entire GDP

Debt of mining companies in China’s leading coal province has ballooned to about the same level as its annual economic output, casting doubt over the ability of the regional authority to backstop their new bonds.
The Shanxi government plans to guarantee note sales from seven coal producers owned by the northern province, people familiar with the matter said earlier this month. Total debt of those firms climbed to 1.2 trillion yuan ($184 billion) at the end of 2015, just 100 billion yuan less than the province’s gross domestic product that year, according to a May 5 report from Citic Securities Co. Shanxi Jincheng Anthracite Mining Group Co., one of the seven firms, had to offer investors nearly double the yield of similarly-rated notes when it sold AAA rated five-year bonds at the end of last month.
‘Investors are avoiding coal companies right now so it will get harder for them to issue new debt,’ said Li Ning, the general manager of the fixed-income department at Western Securities Co. in Beijing. ‘Plus the Shanxi government supporting the region’s coal companies is financially weak.’
Coal miners in Shanxi, part of what’s known as China’s rust belt, have struggled as the nation’s worst economic slowdown in a quarter century batters demand and Premier Li Keqiang vows to cut excess capacity in industries including coal. Output of the mineral in Shanxi tumbled 10 percent last year from its peak of 976.7 million tons in 2014, according to Bloomberg Intelligence data. Chinese coal companies need to repay 268 billion yuan of bonds coming due by the end of this year, Bloomberg-compiled data show.

This post was published at David Stockmans Contra Corner by Bloomberg Business ‘ May 11, 2016.

There’s No Sign of a China Rebound

China’s monetary and fiscal stimulus have yet to spur a rebound in the world’s second-largest economy, according to the earliest private economic indicators for March.
A purchasing manager’s index focused on small businesses, a gauge of corporate confidence and a new reading of the economy derived from satellite imagery all remained at levels signaling deterioration, though the pace of declines moderated. Sales manager sentiment was unchanged.
The reports follow mixed official data showing investment and property sales recovered in the first two months of the year as trade plummeted and manufacturing remained weak. Meanwhile, the newest data show government reforms to slash industrial capacity and shift to a greater reliance on consumption and services haven’t been able to offset the slump.
‘Confidence of companies is still slowly bottoming,’ Jia Kang, director of the China Academy of New Supply-side Economics, said in a statement. ‘As long as the supply-side reforms can push forward, the effects will gradually show up.’
That’s more unwelcome news for top officials who are gathered this week at the Boao Forum for Asia on the southern island of Hainan to discuss the challenges facing the economy and goals of the reform. Premier Li Keqiang will deliver a keynote speech Thursday and People’s Bank of China Governor Zhou Xiaochuan is scheduled to participate in a panel discussion with Commerce Minister Gao Hucheng and Foreign Minister Wang Yi.

This post was published at David Stockmans Contra Corner on March 25, 2016.

Beijing Bosses Whistling Past The Economic Graveyard

China’s central bank chief oozed calm in an annual press briefing in Beijing Saturday, supported by weeks of composure in markets as investor anxiety over the nation’s currency policy eased.
How long the lull lasts will depend on how policy makers manage a balancing act made tougher by a weaker-than-anticipated start to the year for the world’s No. 2 economy. After People’s Bank of China Governor Zhou Xiaochuan spoke at the country’s annual gathering of the legislature, data showed an ‘alarming’ failure of growth to respond to recent stimulus, Bloomberg Intelligence analysts Tom Orlik and Fielding Chen concluded.
The weakening momentum seen in industrial output and retail sales highlight skepticism about the Communist Party’s goal of achieving average growth of at least 6.5 percent in its five-year plan to 2020. Gavekal Dragonomics calls the target ‘incredible.’ JPMorgan Chase & Co. says a sustainable pace is ‘much lower’ than what officials are targeting for this year.
The danger is that to meet the leadership’s objective, which for 2016 is an expansion of 6.5 percent to 7 percent, Zhou will need to loosen monetary policy faster and further. That could intensify depreciation pressures on the yuan, which has benefited in recent weeks from a drop in the dollar.
Looming Leverage
Looser monetary policy, along with the expanded fiscal deficit pledged by Premier Li Keqiang’s cabinet, would quicken a buildup of debt that already amounts to almost 2.5 times gross domestic product.

This post was published at David Stockmans Contra Corner on March 14, 2016.

The World Economy Wreckers Of Beijing

The desperate suzerains of the Red Ponzi are incorrigible. There appears to be no insult to economic rationality that they will not attempt in order to perpetuate their power, privileges and rule.
So now comes the most preposterous gambit yet. Namely, a veritable tsunami of state handouts to foster, yes, capitalist entrepreneurs!
That’s right. As described by Bloomberg, Premier Li Keqiang gave the word, and, presto, nearly $340 billion poured into an instantly confected army of purported venture capital funds run by local government officialdom all over the land.
China is getting into the venture capital business in a big way. A really, really big way.
The country’s government-backed venture funds raised about 1.5 trillion yuan ($231 billion) in 2015, tripling the amount under management in a single year to2.2 trillion yuan ($340 billion), according to data compiled by the consultancy Zero2IPO Group. That’s the biggest pot of money for startups in the world and almost five times the sum raised by other venture firms last year globally, according to London-based consultancy Preqin Ltd.
Really? These are the same folks who built themselves a 1.2 billion ton steel industry in less than two decades, representing double what they can actually use and far more capacity than the rest of the world combined. That freakish industrial eruption is now tumbling into a red hole of losses, decay, abandonment and waste, but never mind. Now the Beijing comrades are going to seed venture capitalists at 5X the rate of the entire planet?

This post was published at David Stockmans Contra Corner by David Stockman ‘ March 9, 2016.

Meet The Red VCs – -China Pumps $338 Billion Into Government Run Venture Funds; Colossal Waste Ahead

China is getting into the venture capital business in a big way. A really, really big way.
The country’s government-backed venture funds raised about 1.5 trillion yuan ($231 billion) in 2015, tripling the amount under management in a single year to 2.2 trillion yuan, according to data compiled by the consultancy Zero2IPO Group. That’s the biggest pot of money for startups in the world and almost five times the sum raised by other venture firms last year globally, according to London-based consultancy Preqin Ltd.
The money’s in what are known as government guidance funds, where local and central agencies play some role. With 780 such funds nationwide and a lot of experimentation, there’s no set model for how they’re managed or funded. The bulk of their capital comes from tax revenue or state-backed loans.
The money is part of Premier Li Keqiang’s effort to bolster the slowing Chinese economy through innovation and reducing its dependence on heavy industry. The country began a campaign to support entrepreneurship in 2014 and has since opened 1,600 high-tech incubators for startups.
The huge influx of cash raises the possibility of a boom-and-bust cycle like the government-led investment in China’s solar and wind power sectors, said Gary Rieschel, founder of Qiming Venture Partners.

This post was published at David Stockmans Contra Corner on March 9, 2016.

Painting By The Numbers – -The Farce Of Central Planning In China

Fresh evidence of China moving away from a growth-at-all-costs strategy is emerging in the annual targets of the nation’s regional authorities.
With new metrics like debt sustainability and cleaning up the environment rising in focus, 11 of 31 provinces have lowered their growth goals for 2016. Nine have moved away from a pinpoint figure, and now present a range of growth to shoot for – an approach some economists anticipate the national government will adopt when it unveils its objective in March.
The more modest goals are a departure from the days when provincial governments led stimulus binges, creating a debt pile that hangs over today’s growth prospects. While President Xi Jinping and Premier Li Keqiang have signaled they’ll tolerate a slower expansion, they’ve set a line in the sand at an average of 6.5 percent through to 2020 – the pace needed to achieve long-term goals to double incomes and the economy’s size from 2010 levels.
‘The government seems to be lowering the importance of GDP targets and prioritizing things like cleaning up the environment,’ said Zhu Qibing, a Beijing-based analyst at China Minzu Securities Co. ‘The other reason for targeting a range is the increasing difficulty in reaching targets as the economy slows. It’s embarrassing to set a low target, but a high target is too difficult to meet. So a range provides some flexibility.’

This post was published at David Stockmans Contra Corner by Bloomberg Business ‘ January 29, 2016.

Inside The Red Ponzi – – Why China’s $28 Trillion Debt Mountain Is Scary

Lost in all the Chinese stock and currency market gyrations, policy missteps and mixed data is this economic reality: The government is constrained by a credit bubble that has ballooned to $28 trillion in an economy growing at its slowest pace in 25 years.
QuickTakeChina’s Debt Bomb
Policy zig-zags have left investors divided over how wedded President Xi Jinping and Premier Li Keqiang are to financial sector reform and shifting their $10 trillion-plus economy from one powered by investment andexports to one more focused on consumption and services.
China has appeared to backtrack on pledges to make its management of the yuan more market driven and there’s uncertainty over the government’s willingness to remove stock price supports imposed during a $5 trillion sell-off last summer. Amid the confusion, the benchmark CSI 300 Index, down 14 percent in 2016, has revisited the lows of last year’s rout and pressure on the currency continues.
Against that backdrop, Chinese officialdom faces the high-wire act of trying to keep the economy growing rapidly enough to repay past obligations, without resorting to a fresh pick-up in debt to fund more stimulus. It was China’s reliance on credit-fueled growth in the wake of the 2008 global financial crisis that resulted in one of the biggest debt expansions in recent history, and today’s hangover.

This post was published at David Stockmans Contra Corner by Bloomberg Business ‘ January 15, 2016.

Red Ponzi Breaking – -China’s October Loan Growth Plunges To One-Half Of Forecast

China’s broadest measure of new credit slumped to the lowest in 15 months in October, adding to evidence six central bank interest-rate cuts in a year have yet to spur a sustained pick up in borrowing.
Aggregate financing fell to 476.7 billion yuan ($75 billion), according to a report from the People’s Bank of China on Thursday. That was lower than all 25 economists’ projections and less than half the median forecast 1.05 trillion yuan.
The data rounds out a week of mixed readings that have showed falling exports, tame inflation, slowing industrial output, and a rare bright spot in the form of increased retail spending. The readings underscore the government’s challenge to kick start growth in an economy weighed by overcapacity and debt.
‘Notwithstanding the PBOC’s efforts, the lending channel is not working in China,’ said Hong Kong-based Alicia Garcia Herrero, chief Asia Pacific economist at Natixis. ‘The reason is simple: too much leverage.’
In speech delivered Monday and circulated by state media today, Premier Li Keqiang indicated the government has room to act given that the fiscal deficit is only 2.3 percent, adding that the country could lower taxes further. Li said China must find a balance between stabilizing growth and following through with structural reform.

This post was published at David Stockmans Contra Corner by Bloomberg Business ‘ November 12, 2015.

Restless In The Red Ponzi – – China’s July/August Capital Outflow Surges To $267 Billion

Money is leaving China faster than ever, according to a Bloomberg gauge tracking capital flows.
An estimated $141.66 billion left China in August, exceeding the previous record of $124.62 billion in July, data compiled by Bloomberg show.
The gauge of so-called ‘hot money’ is an estimate of the sum offoreign exchange purchases by banks and the change in foreign exchange deposits to measure flows into and out of the country. The monthly trade and direct investment balances are netted out for an estimate of portfolio flows. An exporter choosing to keep foreign earnings offshore would show as a capital outflow.
The capital flight came as the People’s Bank of China shocked global markets by devaluing the yuan Aug. 11, triggering a worldwide drop in commodities, equities and emerging-market currencies. Chinese Premier Li Keqiang tried to soothe investor concerns this month by calling his country a global growth engine instead of a source of risk, while President Xi Jinping has stuck to a similar script while on his first state visit to the U. S. this week. ‘My worry is that, given the relatively large economic downward pressure, as China is opening up the capital account, it means more money will leave China,’ Huang Yiping, a PBOC adviser and Peking University economics professor, said on a World Economic Forum panel discussion this month in Dalian, China. ‘If there’s an overall capital outflow in the future, it will bring depreciation pressure.’

This post was published at David Stockmans Contra Corner on September 25, 2015.

China Is The Epicenter Of The Stock Market Crisis – – -Why It Happened

‘When the wind of change blows, some build walls while others build windmills.’ In late January, Chinese Premier Li Keqiang shared that proverb with global leaders in a keynote speech at the World Economic Forum in Davos.
China was in windmill mode, committed to structural reform ‘no matter how difficult.’ The ‘new normal’ called for more moderate, consumer-led growth. The financial system would be modernized and the country aimed to shift away from its excessive reliance on debt-fueled, infrastructure-powered growth that had led to industrial overcapacity and an epic credit bubble.

This post was published at David Stockmans Contra Corner by Bloomberg Business ‘ August 26, 2015.

China Reality Update – – July Exports Drop 8.3% Y/Y

China’s exports declined more than expected in July, hobbled by a strong yuan and lower demand in the European Union, and adding pressure on Premier Li Keqiang to stabilize growth.
Overseas shipments fell 8.3 percent from a year earlier in dollar terms, the customs administration said. The reading was well below the estimate for a 1.5 percent decline in aBLOOMBERG survey and compared with an increase of 2.8 percent in June. Imports dropped 8.1 percent, widening from a 6.6 percent decrease in June, leaving a trade surplus of $43 billion. It came despite a few bright spots, including the highest monthly steel exports since January.
Along with weak domestic investment, subdued global demand is putting China’s 2015 growth target of about 7 percent at risk. The government has rolled out fresh pro-expansion measures, including special bond sales to finance construction, but has held off weakening the yuan as China seeks reserve-currency status.
‘Exports are no longer an engine for China growth – no matter what the government does, it’s just impossible to see strong export growth as in the past,’ said Bank of Communications economist Liu Xuezhi. ‘It means additional slowdown pressure, and it requires the government to be more aggressive in the domestic market.’

This post was published at David Stockmans Contra Corner on August 9, 2015.

Chinese Factory Data Shows Weakest Start in Six Years

China’s economy is already behind target as monetary easing shows few signs of traction.
Industrial output, investment and retail sales growth missed analysts’ estimates in January and February, suggesting more stimulus is needed to boost the world’s second-largest economy. Bloomberg’s gross domestic product tracker, which draws on that data as well as measures such as electricity production, shows economic growth slowing to 6.28 percent in the period, the weakest pace since the start of 2009.
Premier Li Keqiang last week set the nation’s 2015 expansion target at about 7 percent, the slowest in more than 15 years, as China’s leaders grapple with the debt, pollution and corruption spurred in a three-decade-long economic boom. The central bank has sought to cushion the slowdown with two interest rate cuts and one reduction to banks’ reserve requirements in the past four months.
“The mix of the real activity indicators suggests the effects of monetary policy easing effort so far has remained limited,” Liu Li-Gang, chief economist for greater China at Australia & New Zealand Banking Group Ltd. in Hong Kong, wrote in a note. “Further easing effort or even targeted ‘fiscal stimulus’ is needed in order to arrest the downside risk.”

This post was published at bloomberg

China Cooling: Cities Face Judgment Day on Debts As Costs Soar

China’s local government bond issuers face judgment day as authorities in the world’s second-largest economy decide which debt they will or won’t support.
Borrowing costs soared by a record amount last month before today’s deadline for classifying liabilities, on speculation some local government financing vehicles will lose government support after the finance ministrystarts reviewing regional authorities’ debt reports. Yield premiums on one-year AA notes, the most common ranking for such issuers, jumped a record 98 basis points in December.
Premier Li Keqiang has stepped up curbs on local borrowings just as LGFVs prepare to repay 558.7 billion yuan ($89.8 billion) of bonds this year amid economic growth that’s set for the slowest pace in more than two decades. The yield on the 2018 notes of Xinjiang Shihezi Development Zone Economic Construction Co., a financing arm in a northwestern city with 620,000 people, climbed a record 63 basis points in December.
‘LGFV bonds that don’t get classified as local government debt will lose government guarantees and their credit risks will be re-priced,’ said Huo Zhihui, an analyst at China Credit Rating Co. in Beijing. ‘Those that get counted as local government debt will get definitive government support.’
Categorizing Debts China’s provinces must submit their reports classifying all local borrowings within their borders including those of LGFVs as either government debt or not by today, according to a finance ministry statement in October. The announcement didn’t specify further steps after the reports.

This post was published at David Stockmans Contra Corner on January 5, 2015.