Global Markets in Review: Despite Cheer, Risky Assets Look Weary [View article]
Let me insert some thought on China by way of a piece I am writing on recent credit developments. Most material is mine but I have drawn upon Bloomberg, FT and other sources.
Chinese Premier Wen in March set a new loan growth target of 5 trillion yuan in 2009 for the banking industry to revive economic growth that dropped to 6.1 percent in the first quarter, the slowest pace in almost a decade. New loans, which reached a record 7.73 trillion yuan as of July 31, may top 11 trillion yuan by the end of the year, BNP Paribas SA estimates.
Bank lending tripled in H12009 over H12008 and the money supply expanded at a 26% rate in the first half of this year. As a result, a number of interrelated developments within China that are causing banking authorities, in the most muted manner, to suggest further bank lending will be more carefully supervised and controlled to ensure (1) that additional surplus capacity is not built, (2) speculation in commodities, equities, housing and other sphere is drawn-in, and (3) that approved projects actually receive the approved funding.
Additionally, The China Banking Regulatory Commission last month required the nation’s lenders to raise reserves to 150 percent of non- performing loans by the end of this year, and on in July it announced plans to tighten rules on working capital loans. More recently, The regulator also sent draft rule changes to banks requiring them to deduct all existing holdings of subordinated and hybrid debt from supplementary capital, people familiar with the matter said last week. As a result, banks may need to rein in lending to meet capital requirements.
We also know that corporations with falling earnings are being extended additional credit and loans are being recapitalized to conceal the true level of non-performing loans. But, this may be just the tip of the iceberg because much of the lending is being done in support of the larger stimulus package. Little known, though, is only around 30 per cent of the stimulus cash will come from central coffers, with the rest provided by local governments and companies, largely funded by bank loans and bond issuances.
Aside from bank loans, a large chunk of financing is meant to come from a new type of local government bond. Since local governments are technically banned from running budget deficits, the Ministry of Finance issues these bonds on local governments’ behalf; cities typically use quasi-legal Municipal Development and Investment Companies (MDIC) to invest funds on the government’s behalf. The result is a tangle of murky financing that makes it impossible to establish the true budgets and debt positions of city governments.
What is known, though, is that cities and provinces making new loans are being strained and starting to buckle; they have very little in the way of revenue to retire these MDIC issuances. Poorer provinces, with scant resources, may default on their bonds, leaving the central government to pick up the bill. In this event, the central government may respond by withholding fiscal transfers from central coffers. Other, more prosperous, local governments have relied on land sales to fund investment. But with land rapidly running out and stimulus spending adding to the pressure, many are experiencing a funding squeeze.
Nobody can be certain how this will play out but all of these are pieces of a mosaic of aggressive monetary and fiscal policy that placing further strain on an economy challenged by collapsing exports. In my humble view, there are more stresses in China’s system that we are led to believe and China could easily stumble in leading the world out of the great recession.
Global Markets in Review: Despite Cheer, Risky Assets Look Weary [View article]
Chinese Premier Wen in March set a new loan growth target of 5 trillion yuan in 2009 for the banking industry to revive economic growth that dropped to 6.1 percent in the first quarter, the slowest pace in almost a decade. New loans, which reached a record 7.73 trillion yuan as of July 31, may top 11 trillion yuan by the end of the year, BNP Paribas SA estimates.
Bank lending tripled in H12009 over H12008 and the money supply expanded at a 26% rate in the first half of this year. As a result, a number of interrelated developments within China that are causing banking authorities, in the most muted manner, to suggest further bank lending will be more carefully supervised and controlled to ensure (1) that additional surplus capacity is not built, (2) speculation in commodities, equities, housing and other sphere is drawn-in, and (3) that approved projects actually receive the approved funding.
Additionally, The China Banking Regulatory Commission last month required the nation’s lenders to raise reserves to 150 percent of non- performing loans by the end of this year, and on in July it announced plans to tighten rules on working capital loans. More recently, The regulator also sent draft rule changes to banks requiring them to deduct all existing holdings of subordinated and hybrid debt from supplementary capital, people familiar with the matter said last week. As a result, banks may need to rein in lending to meet capital requirements.
We also know that corporations with falling earnings are being extended additional credit and loans are being recapitalized to conceal the true level of non-performing loans. But, this may be just the tip of the iceberg because much of the lending is being done in support of the larger stimulus package. Little known, though, is only around 30 per cent of the stimulus cash will come from central coffers, with the rest provided by local governments and companies, largely funded by bank loans and bond issuances.
Aside from bank loans, a large chunk of financing is meant to come from a new type of local government bond. Since local governments are technically banned from running budget deficits, the Ministry of Finance issues these bonds on local governments’ behalf; cities typically use quasi-legal Municipal Development and Investment Companies (MDIC) to invest funds on the government’s behalf. The result is a tangle of murky financing that makes it impossible to establish the true budgets and debt positions of city governments.
What is known, though, is that cities and provinces making new loans are being strained and starting to buckle; they have very little in the way of revenue to retire these MDIC issuances. Poorer provinces, with scant resources, may default on their bonds, leaving the central government to pick up the bill. In this event, the central government may respond by withholding fiscal transfers from central coffers. Other, more prosperous, local governments have relied on land sales to fund investment. But with land rapidly running out and stimulus spending adding to the pressure, many are experiencing a funding squeeze.
Nobody can be certain how this will play out but all of these are pieces of a mosaic of aggressive monetary and fiscal policy that placing further strain on an economy challenged by collapsing exports. In my humble view, there are more stresses in China’s system that we are led to believe and China could easily stumble in leading the world out of the great recession.