China Economy Forum

[cirr]

RMB makes Australian debut

By Jiang Xueqing (chinadaily.com.cn)

Updated: 2014-07-29 14:18

A yuan clearing system, jointly developed between the Bank of China and the Australian Securities Exchange, has made the yuan, the first foreign currency in Australia's local clearing system.

The launch is a crucial step forward for the currency, creating easier bilateral trade and investment cooperation between the countries and promoting the development of an offshore yuan market in Australia, said the bank.

The bank's Sydney branch is the first Chinese financial institution in Australia and the only one with a full banking license in the country.

RMB makes Australian debut - Business - Chinadaily.com.cn

 

[LeveragedBuyout]

LeveragedBuyout's qualification: I am compelled to excerpt the following two paragraphs first to counter the predictable hysterical response:

V-Lab’s figures don’t suggest the likelihood of a crisis, however, just the risk one poses to a country’s financial system. As a percentage of its GDP, moreover, the cost to keep China’s banking sector afloat seems less onerous. On this ranking, China places 10th behind a group led by France, the United Kingdom and Japan.

That has led a number of economists to conclude that China can easily mop up any financial crisis, using central government funds to bail out both banks and heavily indebted local governments and prevent the kind of balance-sheet recession from which the U.S. and EU are still trying to recover.

And now, the article.

China’s Banks Pose World’s Largest Systemic Risk - China Real Time Report - WSJ

• 

• July 29, 2014, 6:22 PM HKT

China’s Banks Pose World’s Largest Systemic Risk

The headquarters of the People’s Bank of China.
Reuters
The cost of propping up China’s banks in the event of a financial crisis has nearly quadrupled in the past three years to $526.2 billion, the largest of any banking system, according to the latest analysis by the Volatility Laboratory at New York University’s Stern School of Business .

The V-lab uses data from publicly-listed banks to estimate how much additional capital would be needed to keep them solvent if stocks fell by at least 40% in six months. The exact methodology is explained in this research paper. It’s heavy going, but suffice to say it uses the banks’ balance sheets and stock prices to mimic the kind of stress tests central banks use to determine whether banks have enough capital to withstand financial storms on the same scale as the global financial crisis in 2008.

China’s banks, if the V-Lab’s calculations are any indication, do not. Beijing’s efforts to revive growth since March have succeeded in nudging GDP growth back up to 7.5% in the second quarter from 7.4% in the first three months of 2014. Government spending rose a quarter in June from a year earlier, according to the finance ministry. But the so-called mini-stimulus has also renewed a boom in domestic credit, with loan growth climbing 25% in June from the year before to 1.08 trillion yuan ($174.2 billion).

V-Lab doesn’t explain why the costs are rising, but the increase is in line with the explosion in bank lending in recent years. With the economy slowing and the risk of defaults rising, investors have pushed banks’ stock prices to record low levels relative to the book value of the banks’ loans. Bank of China, for example, trades at less than its book value.

“This seems to be a result of the fact that liabilities of the Chinese banks have continued to grow rapidly while stock valuations of the institutions appear quite vulnerable to a downturn,” wrote James Hamilton, an economics professor at the University of California, San Diego, in his blog, Econbrowser.

The credit boom has helped worsen an already mounting risk to China’s financial system, according to V-Lab’s calculations. The next riskiest country on V-Lab’s list is Japan, where a bailout would cost $495.8 billion. France comes in third at $347.6 billion. The U.S. stood at around $300 billion.

It may come as no surprise that China’s biggest banks top the list of the riskiest to the system — the bigger the come, the harder they fall and the more money it would take to prop them back up. Bank of China tops the chart, followed by the Agricultural Bank of China, China Construction Bank and the Industrial & Commercial Bank of China.

V-Lab’s figures don’t suggest the likelihood of a crisis, however, just the risk one poses to a country’s financial system. As a percentage of its GDP, moreover, the cost to keep China’s banking sector afloat seems less onerous. On this ranking, China places 10th behind a group led by France, the United Kingdom and Japan.

That has led a number of economists to conclude that China can easily mop up any financial crisis, using central government funds to bail out both banks and heavily indebted local governments and prevent the kind of balance-sheet recession from which the U.S. and EU are still trying to recover.

But the IMF and World Bank have both warned that China needs to rein in lending and promote reform or face an increasing risk that it may have to test that hypothesis.

– Wayne Arnold

 

[Hypersonicmissiles]

This scumbag Yankee only posts China collapse article by the Yankee propaganda mouthpieces.

Most likely a CIA paid troll.

 

[Aepsilons]

V-Lab’s figures don’t suggest the likelihood of a crisis, however, just the risk one poses to a country’s financial system. As a percentage of its GDP, moreover, the cost to keep China’s banking sector afloat seems less onerous. On this ranking, China places 10th behind a group led by France, the United Kingdom and Japan.
That has led a number of economists to conclude that China can easily mop up any financial crisis, using central government funds to bail out both banks and heavily indebted local governments and prevent the kind of balance-sheet recession from which the U.S. and EU are still trying to recover.

This is rather interesting. @LeveragedBuyout , are there suspicious activity within China's banking system(s) that leaves one wanting? Please enlighten me on this, Sir.

 

[LeveragedBuyout]

This is rather interesting. @LeveragedBuyout , are there suspicious activity within China's banking system(s) that leaves one wanting? Please enlighten me on this, Sir.

Yes. In short, China's way of classifying whether a loan is non-performing or not is... not up to American standards. NPLs are not written down (i.e. slashed in value to reflect the likelihood that the loan will never be repaid, which will result in a charge to the bank's P&L), they are rolled over--this should sound familiar to you, because that is what caused the zombie banking system and the lost decade in Japan. Investors do not trust that China's banks are reflecting this, which is why they trade at a discount to book value (very unusual for banks, which usually trade at a slight premium to book value).

Banks have largely resorted to selling off their bad loans to avoid reporting spikes in NPLs, and the buyers of these loans are the "bad bank" asset managers that @Edison Chen has referred to in previous posts in this thread.

Here's the bottom line: can we trust that the Chinese banking regulator and Chinese banks are transparent about this issue, and that the numbers they report are real? If so, then the article above should hold, and China should be able to resolve any stress to the financial system in case of an economic crisis. If not, the Chinese system will blow up, since NPLs were hidden, and the problem may be an order of magnitude larger than the analysts (and the Chinese government) expect.

Here's an article from last year on this issue.

http://online.wsj.com/news/articles/SB10001424052702304355104579235084041750444

Skepticism on China's Nonperforming Loans
Despite Strong Data, Values of Country's Leading Banks Decline in Reflection of Investor Worries About Credit Quality
By
CYNTHIA KOONS
CONNECT
Updated Dec. 3, 2013 10:00 p.m. ET
China's banks are among the world's healthiest and most profitable, based on their financial statements. But investors aren't convinced.

Nonperforming loans account for less than 1% of total loans, a ratio that has been falling in recent years and is now one of the lowest in the world, according to World Bank data. Despite this, price-to-book values of the country's leading banks have been declining over the past few years, reflecting worries about deteriorating credit quality in China.

"People are very skeptical about the [nonperforming-loan] ratios," said Jim Antos, a banking analyst at Mizuho Securities. "The market is saying: 'We just don't trust the credit-quality trends in China.'"
The reason China's bad-debt levels are so low boils down to the tendency of the country's banks to routinely extend or restructure loans to borrowers, or sell them, rather than admit they have gone bad and record a loss in their accounts, analysts say. While the tactic is also used in the West and was a major source of concern during the financial crisis, it is increasingly prevalent in China, where lending has been booming over the past five years. In the U.S., bad loans are 3.9% of total loans.

"There is a culture of rolling things over when they come due at least once, often more," said Charlene Chu, an analyst at Fitch Ratings. In rolling over a loan, a bank can renew the debt or push out the repayment deadline. "In fact, one of the main functions of China's shadow finance system is to provide temporary credit to facilitate rollovers and interest payments," she added.

China's Yingli Green Energy Holding Co., the world's biggest solar- panel maker by sales, is confident it will be able to roll over its debt with Chinese lenders this year, a spokesman said. There is no suggestion that the company is unable to meet its obligations, but it has recorded losses for more than two years as solar-panel prices have fallen amid a glut. Yingli had $1.2 billion in short-term debt outstanding at the end of September, and rolled over about $1.3 billion of debt that was due in 2012, most of which was owed to Chinese banks, according to filings.

The country's regulators discourage banks from rolling over troubled loans, in an effort to ensure that asset-quality data accurately reflects reality. But the sheer volume of loans this year indicates much of the debt in the system is being rolled over, according to Ms. Chu. In China's banking system, 9.5 trillion Chinese yuan ($1.6 trillion) of new loans will have been given out this year, even after repayments are taken into account, by Fitch's estimates.

Fitch predicts that this year, more than 10 trillion yuan of additional credit will be extended through shadow banking, a system of loosely regulated nonbank lenders like trust companies and pawnbrokers. Banks don't disclose data on rolled-over loans.

Banks need a reason to justify rolling over a loan, particularly if a company can't repay it. But there are ways around the hurdle. "If you can demonstrate other banks are willing to provide the loans to repay yours, then that's a justification for a bank to continue giving a loan," Barclays analyst May Yan said.

When they do roll over loans, Chinese banks sometimes do it in creative ways. To skirt restrictions on rolling over loans, banks cooperate with informal lenders that provide bank customers with short-term loans with high interest rates. That borrowing is used to repay a bank loan on the understanding that the bank will issue a new loan two or three weeks later. Such behavior can, in some instances, lead to bigger corporate-debt burdens.

"You look at the data and it just starts to get ridiculous how high some of the debt burdens are and that can't go on into infinity," Fitch's Ms. Chu said. "But over the short term there's nothing to say that this has to end right now and a lot of it comes down to banks' willingness to continue to extend and rollover credit."

China's economic slowdown has started to hurt industries like shipbuilding, steel and solar power, as well as the more developed east coast, home to cities like Beijing and Shanghai. Nonperforming loans in the first six months of 2013 rose 22% on the east coast from the final six months of 2012, while nonperforming loans in the rest of China declined 5%, according to Bernstein Research.

Nonperforming loan ratios have fallen from 22.4% in 2000, but bad debts are rising, as Bernstein's numbers indicate. This comes as the government is working to rein in lending: In October, net local-currency loans extended in China totaled $83 billion, down 36% from September and the lowest monthly figure all year.

Apart from rolling over bad debt, banks have also sold off soured loans to keep their nonperforming-loan ratios low. For instance, in the first half of this year, China's fifth-largest listed bank, Bank of Communications Co.
, sold 5.1 billion yuan (US$837 million) of bad loans to an asset-management company that is designed to buy such loans from banks. Without the sale, the bank's nonperforming-loan ratio would have climbed to 1.15%, rather than the 0.99% the lender reported, said Mike Werner, a Bernstein analyst.

"NPL disposals were the key for Bank of Communications to keep NPL balances in check," Mr. Werner said. Bank of Communications declined to comment.

—Wayne Ma and Dinny McMahon contributed to this article.

 

[eazzy]

Reading too much Wall Street Journal is very unhealthy.

 

[Genesis]

LeveragedBuyout's qualification: I am compelled to excerpt the following two paragraphs first to counter the predictable hysterical response:

V-Lab’s figures don’t suggest the likelihood of a crisis, however, just the risk one poses to a country’s financial system. As a percentage of its GDP, moreover, the cost to keep China’s banking sector afloat seems less onerous. On this ranking, China places 10th behind a group led by France, the United Kingdom and Japan.

That has led a number of economists to conclude that China can easily mop up any financial crisis, using central government funds to bail out both banks and heavily indebted local governments and prevent the kind of balance-sheet recession from which the U.S. and EU are still trying to recover.

And now, the article.

China’s Banks Pose World’s Largest Systemic Risk - China Real Time Report - WSJ

• 

• July 29, 2014, 6:22 PM HKT

China’s Banks Pose World’s Largest Systemic Risk

The headquarters of the People’s Bank of China.
Reuters
The cost of propping up China’s banks in the event of a financial crisis has nearly quadrupled in the past three years to $526.2 billion, the largest of any banking system, according to the latest analysis by the Volatility Laboratory at New York University’s Stern School of Business .

The V-lab uses data from publicly-listed banks to estimate how much additional capital would be needed to keep them solvent if stocks fell by at least 40% in six months. The exact methodology is explained in this research paper. It’s heavy going, but suffice to say it uses the banks’ balance sheets and stock prices to mimic the kind of stress tests central banks use to determine whether banks have enough capital to withstand financial storms on the same scale as the global financial crisis in 2008.

China’s banks, if the V-Lab’s calculations are any indication, do not. Beijing’s efforts to revive growth since March have succeeded in nudging GDP growth back up to 7.5% in the second quarter from 7.4% in the first three months of 2014. Government spending rose a quarter in June from a year earlier, according to the finance ministry. But the so-called mini-stimulus has also renewed a boom in domestic credit, with loan growth climbing 25% in June from the year before to 1.08 trillion yuan ($174.2 billion).

V-Lab doesn’t explain why the costs are rising, but the increase is in line with the explosion in bank lending in recent years. With the economy slowing and the risk of defaults rising, investors have pushed banks’ stock prices to record low levels relative to the book value of the banks’ loans. Bank of China, for example, trades at less than its book value.

“This seems to be a result of the fact that liabilities of the Chinese banks have continued to grow rapidly while stock valuations of the institutions appear quite vulnerable to a downturn,” wrote James Hamilton, an economics professor at the University of California, San Diego, in his blog, Econbrowser.

The credit boom has helped worsen an already mounting risk to China’s financial system, according to V-Lab’s calculations. The next riskiest country on V-Lab’s list is Japan, where a bailout would cost $495.8 billion. France comes in third at $347.6 billion. The U.S. stood at around $300 billion.

It may come as no surprise that China’s biggest banks top the list of the riskiest to the system — the bigger the come, the harder they fall and the more money it would take to prop them back up. Bank of China tops the chart, followed by the Agricultural Bank of China, China Construction Bank and the Industrial & Commercial Bank of China.

V-Lab’s figures don’t suggest the likelihood of a crisis, however, just the risk one poses to a country’s financial system. As a percentage of its GDP, moreover, the cost to keep China’s banking sector afloat seems less onerous. On this ranking, China places 10th behind a group led by France, the United Kingdom and Japan.

That has led a number of economists to conclude that China can easily mop up any financial crisis, using central government funds to bail out both banks and heavily indebted local governments and prevent the kind of balance-sheet recession from which the U.S. and EU are still trying to recover.

But the IMF and World Bank have both warned that China needs to rein in lending and promote reform or face an increasing risk that it may have to test that hypothesis.

– Wayne Arnold

cool, but here's my take, China will crash, well maybe too strong, China will have problems at some point, that's inevitable, all nations must go through it I believe.

However, China is a continent of its own, we have the infrastructure, we have the population, we have all the necessary components ready, like Germany and Japan, as well as US after 1929, we will also rise again.

I believe it's hard to change fundamentally without something crazy, and in order to transition, that might be exactly what we need.

What's your take?

 

[LeveragedBuyout]

Reading too much Wall Street Journal is very unhealthy.

If you've read my posts, you'll know that I'm far from the "China is a fraud/China will crash and burn" crowd. The WSJ is a professional and well-respected organization, and these are valid points that it raises. It's also true that the Chinese financial system is far more opaque, and far less exposed to market discipline, than the American system, so some extra skepticism is warranted.

Will it be the worst case scenario? I doubt it. But the point is that we can't know until it happens, since China lacks transparency.

 

[Aepsilons]

Yes. In short, China's way of classifying whether a loan is non-performing or not is... not up to American standards. NPLs are not written down (i.e. slashed in value to reflect the likelihood that the loan will never be repaid, which will result in a charge to the bank's P&L), they are rolled over--this should sound familiar to you, because that is what caused the zombie banking system and the lost decade in Japan. Investors do not trust that China's banks are reflecting this, which is why they trade at a discount to book value (very unusual for banks, which usually trade at a slight premium to book value).

Banks have largely resorted to selling off their bad loans to avoid reporting spikes in NPLs, and the buyers of these loans are the "bad bank" asset managers that @Edison Chen has referred to in previous posts in this thread.

Here's the bottom line: can we trust that the Chinese banking regulator and Chinese banks are transparent about this issue, and that the numbers they report are real? If so, then the article above should hold, and China should be able to resolve any stress to the financial system in case of an economic crisis. If not, the Chinese system will blow up, since NPLs were hidden, and the problem may be an order of magnitude larger than the analysts (and the Chinese government) expect.

Here's an article from last year on this issue.

http://online.wsj.com/news/articles/SB10001424052702304355104579235084041750444

Skepticism on China's Nonperforming Loans
Despite Strong Data, Values of Country's Leading Banks Decline in Reflection of Investor Worries About Credit Quality
By
CYNTHIA KOONS
CONNECT
Updated Dec. 3, 2013 10:00 p.m. ET
China's banks are among the world's healthiest and most profitable, based on their financial statements. But investors aren't convinced.

Nonperforming loans account for less than 1% of total loans, a ratio that has been falling in recent years and is now one of the lowest in the world, according to World Bank data. Despite this, price-to-book values of the country's leading banks have been declining over the past few years, reflecting worries about deteriorating credit quality in China.

"People are very skeptical about the [nonperforming-loan] ratios," said Jim Antos, a banking analyst at Mizuho Securities. "The market is saying: 'We just don't trust the credit-quality trends in China.'"
The reason China's bad-debt levels are so low boils down to the tendency of the country's banks to routinely extend or restructure loans to borrowers, or sell them, rather than admit they have gone bad and record a loss in their accounts, analysts say. While the tactic is also used in the West and was a major source of concern during the financial crisis, it is increasingly prevalent in China, where lending has been booming over the past five years. In the U.S., bad loans are 3.9% of total loans.

"There is a culture of rolling things over when they come due at least once, often more," said Charlene Chu, an analyst at Fitch Ratings. In rolling over a loan, a bank can renew the debt or push out the repayment deadline. "In fact, one of the main functions of China's shadow finance system is to provide temporary credit to facilitate rollovers and interest payments," she added.

China's Yingli Green Energy Holding Co., the world's biggest solar- panel maker by sales, is confident it will be able to roll over its debt with Chinese lenders this year, a spokesman said. There is no suggestion that the company is unable to meet its obligations, but it has recorded losses for more than two years as solar-panel prices have fallen amid a glut. Yingli had $1.2 billion in short-term debt outstanding at the end of September, and rolled over about $1.3 billion of debt that was due in 2012, most of which was owed to Chinese banks, according to filings.

The country's regulators discourage banks from rolling over troubled loans, in an effort to ensure that asset-quality data accurately reflects reality. But the sheer volume of loans this year indicates much of the debt in the system is being rolled over, according to Ms. Chu. In China's banking system, 9.5 trillion Chinese yuan ($1.6 trillion) of new loans will have been given out this year, even after repayments are taken into account, by Fitch's estimates.

Fitch predicts that this year, more than 10 trillion yuan of additional credit will be extended through shadow banking, a system of loosely regulated nonbank lenders like trust companies and pawnbrokers. Banks don't disclose data on rolled-over loans.

Banks need a reason to justify rolling over a loan, particularly if a company can't repay it. But there are ways around the hurdle. "If you can demonstrate other banks are willing to provide the loans to repay yours, then that's a justification for a bank to continue giving a loan," Barclays analyst May Yan said.

When they do roll over loans, Chinese banks sometimes do it in creative ways. To skirt restrictions on rolling over loans, banks cooperate with informal lenders that provide bank customers with short-term loans with high interest rates. That borrowing is used to repay a bank loan on the understanding that the bank will issue a new loan two or three weeks later. Such behavior can, in some instances, lead to bigger corporate-debt burdens.

"You look at the data and it just starts to get ridiculous how high some of the debt burdens are and that can't go on into infinity," Fitch's Ms. Chu said. "But over the short term there's nothing to say that this has to end right now and a lot of it comes down to banks' willingness to continue to extend and rollover credit."

China's economic slowdown has started to hurt industries like shipbuilding, steel and solar power, as well as the more developed east coast, home to cities like Beijing and Shanghai. Nonperforming loans in the first six months of 2013 rose 22% on the east coast from the final six months of 2012, while nonperforming loans in the rest of China declined 5%, according to Bernstein Research.

Nonperforming loan ratios have fallen from 22.4% in 2000, but bad debts are rising, as Bernstein's numbers indicate. This comes as the government is working to rein in lending: In October, net local-currency loans extended in China totaled $83 billion, down 36% from September and the lowest monthly figure all year.

Apart from rolling over bad debt, banks have also sold off soured loans to keep their nonperforming-loan ratios low. For instance, in the first half of this year, China's fifth-largest listed bank, Bank of Communications Co.
, sold 5.1 billion yuan (US$837 million) of bad loans to an asset-management company that is designed to buy such loans from banks. Without the sale, the bank's nonperforming-loan ratio would have climbed to 1.15%, rather than the 0.99% the lender reported, said Mike Werner, a Bernstein analyst.

"NPL disposals were the key for Bank of Communications to keep NPL balances in check," Mr. Werner said. Bank of Communications declined to comment.

—Wayne Ma and Dinny McMahon contributed to this article.

Yes. In short, China's way of classifying whether a loan is non-performing or not is... not up to American standards. NPLs are not written down (i.e. slashed in value to reflect the likelihood that the loan will never be repaid, which will result in a charge to the bank's P&L), they are rolled over--this should sound familiar to you, because that is what caused the zombie banking system and the lost decade in Japan. Investors do not trust that China's banks are reflecting this, which is why they trade at a discount to book value (very unusual for banks, which usually trade at a slight premium to book value).

Banks have largely resorted to selling off their bad loans to avoid reporting spikes in NPLs, and the buyers of these loans are the "bad bank" asset managers that @Edison Chen has referred to in previous posts in this thread.

Here's the bottom line: can we trust that the Chinese banking regulator and Chinese banks are transparent about this issue, and that the numbers they report are real? If so, then the article above should hold, and China should be able to resolve any stress to the financial system in case of an economic crisis. If not, the Chinese system will blow up, since NPLs were hidden, and the problem may be an order of magnitude larger than the analysts (and the Chinese government) expect.

Here's an article from last year on this issue.

http://online.wsj.com/news/articles/SB10001424052702304355104579235084041750444

Skepticism on China's Nonperforming Loans
Despite Strong Data, Values of Country's Leading Banks Decline in Reflection of Investor Worries About Credit Quality
By
CYNTHIA KOONS
CONNECT
Updated Dec. 3, 2013 10:00 p.m. ET
China's banks are among the world's healthiest and most profitable, based on their financial statements. But investors aren't convinced.

Nonperforming loans account for less than 1% of total loans, a ratio that has been falling in recent years and is now one of the lowest in the world, according to World Bank data. Despite this, price-to-book values of the country's leading banks have been declining over the past few years, reflecting worries about deteriorating credit quality in China.

"People are very skeptical about the [nonperforming-loan] ratios," said Jim Antos, a banking analyst at Mizuho Securities. "The market is saying: 'We just don't trust the credit-quality trends in China.'"
The reason China's bad-debt levels are so low boils down to the tendency of the country's banks to routinely extend or restructure loans to borrowers, or sell them, rather than admit they have gone bad and record a loss in their accounts, analysts say. While the tactic is also used in the West and was a major source of concern during the financial crisis, it is increasingly prevalent in China, where lending has been booming over the past five years. In the U.S., bad loans are 3.9% of total loans.

"There is a culture of rolling things over when they come due at least once, often more," said Charlene Chu, an analyst at Fitch Ratings. In rolling over a loan, a bank can renew the debt or push out the repayment deadline. "In fact, one of the main functions of China's shadow finance system is to provide temporary credit to facilitate rollovers and interest payments," she added.

China's Yingli Green Energy Holding Co., the world's biggest solar- panel maker by sales, is confident it will be able to roll over its debt with Chinese lenders this year, a spokesman said. There is no suggestion that the company is unable to meet its obligations, but it has recorded losses for more than two years as solar-panel prices have fallen amid a glut. Yingli had $1.2 billion in short-term debt outstanding at the end of September, and rolled over about $1.3 billion of debt that was due in 2012, most of which was owed to Chinese banks, according to filings.

The country's regulators discourage banks from rolling over troubled loans, in an effort to ensure that asset-quality data accurately reflects reality. But the sheer volume of loans this year indicates much of the debt in the system is being rolled over, according to Ms. Chu. In China's banking system, 9.5 trillion Chinese yuan ($1.6 trillion) of new loans will have been given out this year, even after repayments are taken into account, by Fitch's estimates.

Fitch predicts that this year, more than 10 trillion yuan of additional credit will be extended through shadow banking, a system of loosely regulated nonbank lenders like trust companies and pawnbrokers. Banks don't disclose data on rolled-over loans.

Banks need a reason to justify rolling over a loan, particularly if a company can't repay it. But there are ways around the hurdle. "If you can demonstrate other banks are willing to provide the loans to repay yours, then that's a justification for a bank to continue giving a loan," Barclays analyst May Yan said.

When they do roll over loans, Chinese banks sometimes do it in creative ways. To skirt restrictions on rolling over loans, banks cooperate with informal lenders that provide bank customers with short-term loans with high interest rates. That borrowing is used to repay a bank loan on the understanding that the bank will issue a new loan two or three weeks later. Such behavior can, in some instances, lead to bigger corporate-debt burdens.

"You look at the data and it just starts to get ridiculous how high some of the debt burdens are and that can't go on into infinity," Fitch's Ms. Chu said. "But over the short term there's nothing to say that this has to end right now and a lot of it comes down to banks' willingness to continue to extend and rollover credit."

China's economic slowdown has started to hurt industries like shipbuilding, steel and solar power, as well as the more developed east coast, home to cities like Beijing and Shanghai. Nonperforming loans in the first six months of 2013 rose 22% on the east coast from the final six months of 2012, while nonperforming loans in the rest of China declined 5%, according to Bernstein Research.

Nonperforming loan ratios have fallen from 22.4% in 2000, but bad debts are rising, as Bernstein's numbers indicate. This comes as the government is working to rein in lending: In October, net local-currency loans extended in China totaled $83 billion, down 36% from September and the lowest monthly figure all year.

Apart from rolling over bad debt, banks have also sold off soured loans to keep their nonperforming-loan ratios low. For instance, in the first half of this year, China's fifth-largest listed bank, Bank of Communications Co.
, sold 5.1 billion yuan (US$837 million) of bad loans to an asset-management company that is designed to buy such loans from banks. Without the sale, the bank's nonperforming-loan ratio would have climbed to 1.15%, rather than the 0.99% the lender reported, said Mike Werner, a Bernstein analyst.

"NPL disposals were the key for Bank of Communications to keep NPL balances in check," Mr. Werner said. Bank of Communications declined to comment.

—Wayne Ma and Dinny McMahon contributed to this article.

Thank you for that analysis, Sir @LeveragedBuyout

 

[LeveragedBuyout]

cool, but here's my take, China will crash, well maybe too strong, China will have problems at some point, that's inevitable, all nations must go through it I believe.

However, China is a continent of its own, we have the infrastructure, we have the population, we have all the necessary components ready, like Germany and Japan, as well as US after 1929, we will also rise again.

I believe it's hard to change fundamentally without something crazy, and in order to transition, that might be exactly what we need.

What's your take?

I think that now that China is firmly part of the capitalist world, it cannot avoid the business cycle. So yes, China will have booms, and it will have busts, and yes, China will recover. I do not foresee another century of humiliation for China at this point; China is a "normal" country.

The question is whether China will strengthen its financial system by imposing market discipline, so that issues are acknowledged and dealt with quickly, or will it weaken its system by denying and covering up the issues for as long as possible. The US took the former course after its horrible failures in the financial crisis of 2008. Japan took the latter course after its real estate bubble explosion in 1991.

I think we can agree that the US handled this much better than Japan. By the time Japan took action, it had already sacrificed a generation, but at least it's back on the right track. I hope China learned the applicable lessons and moves swiftly to stop this roll-over of NPLs and forces the banks to write-down the loans and recapitalize the system through equity injections before it's too late. The extreme example is Argentina, which has been denying its problems for 15 or so years, and has sacrificed an entire generation, and will probably sacrifice another generation in the cleaning-up process--if it starts today.

 

[Edison Chen]

China's banks used to have even higher amount of NPL before their IPOs, especially in 1980s or 1990s. But China created for 4 AMCs to buy the NPLs. And these loans are unlikely to be collected forever, some of the loans are of very tiny amounts, as low as 5 yuan, 10 yuan. When I was very young, I came to the village along with some bank managers who was responsible for collecting the repayment, I saw the villagers were too poor to make a living. So the NPLs are died. Some loans made to SOEs can't be collected as well, because of the privatization, the ownership is confused. I think most of the NPLs are directly or indirectly related to government spending. So, you mean those NPLs are still in the system, they will cause systemic risks?

 

[Genesis]

I think that now that China is firmly part of the capitalist world, it cannot avoid the business cycle. So yes, China will have booms, and it will have busts, and yes, China will recover. I do not foresee another century of humiliation for China at this point; China is a "normal" country.

The question is whether China will strengthen its financial system by imposing market discipline, so that issues are acknowledged and dealt with quickly, or will it weaken its system by denying and covering up the issues for as long as possible. The US took the former course after its horrible failures in the financial crisis of 2008. Japan took the latter course after its real estate bubble explosion in 1991.

I think we can agree that the US handled this much better than Japan. By the time Japan took action, it had already sacrificed a generation, but at least it's back on the right track. I hope China learned the applicable lessons and moves swiftly to stop this roll-over of NPLs and forces the banks to write-down the loans and recapitalize the system through equity injections before it's too late. The extreme example is Argentina, which has been denying its problems for 15 or so years, and has sacrificed an entire generation, and will probably sacrifice another generation in the cleaning-up process--if it starts today.

I think there are indications China is the former. While our system of government is non democratic it's actually what will make sure china is the former.

Here's why, CCP must maintain economic growth, they will cut off any arm they need to, to stay alive. Covering up happens, but only when it's not obvious, the recent moves by CCP on pollution, loans, some company just defaulted, as well as anti corruption can be seen as exactly that.


On the off chance that it doesn't and China becomes democratic for some reason, the new president must act.


So either way, one party or another must act.

 

[eazzy]

If you've read my posts, you'll know that I'm far from the "China is a fraud/China will crash and burn" crowd. The WSJ is a professional and well-respected organization, and these are valid points that it raises. It's also true that the Chinese financial system is far more opaque, and far less exposed to market discipline, than the American system, so some extra skepticism is warranted.

Will it be the worst case scenario? I doubt it. But the point is that we can't know until it happens, since China lacks transparency.

I did not read your posts, I just saw that you post many WSJ article...I found myself many time sighing while reading a WSJ article...but I did not read the ones you posted so maybe they are good. It depends on the author I guess...still they have to select these authors.

 

[LeveragedBuyout]

China's banks used to have even higher amount of NPL before their IPOs, especially in 1980s or 1990s. But China created for 4 AMCs to buy the NPLs. And these loans are unlikely to be collected forever, some of the loans are of very tiny amounts, as low as 5 yuan, 10 yuan. When I was very young, I came to the village along with some bank managers who was responsible for collecting the repayment, I saw the villagers were too poor to make a living. So the NPLs are died. Some loans made to SOEs can't be collected as well, because of the privatization, the ownership is confused. I think most of the NPLs are directly or indirectly related to government spending. So, you mean those NPLs are still in the system, they will cause systemic risks?

As long as loans are rolled over, they are not considered NPLs, and thus do not affect a bank's capital stock. That's why rolling over these loans is so insidious, because unless the regulator conducts harsh stress tests against the banks (which it may be doing, but I am unable to follow the Chinese business press), it will be unaware of this problem until it's too late. The NPLs will continue to be rolled over, gradually squeezing out viable businesses as the NPLs are serviced and deadbeat corporations are supported. It is likely the SOEs are primarily responsible for this: banks would happily roll over NPLs for SOEs, since SOEs have an implicit guarantee from the government, so banks feel confident that they will be bailed out in the worst case scenario.

The problem is that if the government has not provisioned for these "hidden" NPLs, then it will cause systemic risk, and possibly systemic failure, in the same way that Iceland's and Ireland's regulators had no idea of the size of the problem until after the crisis had already hit.

That's what I was referring to in my post here (Chinese Economy News & Updates | Page 244 )--can the capital adequacy ratios be trusted, if the NPLs are not being acknowledged?

Since it's all speculation, I tend to trust the regulator, although I remain cautious. That said, there's a reason why investors don't, and until there is more transparency in the system, investors will continue to be very skeptical.

I think there are indications China is the former. While our system of government is non democratic it's actually what will make sure china is the former.

Here's why, CCP must maintain economic growth, they will cut off any arm they need to, to stay alive. Covering up happens, but only when it's not obvious, the recent moves by CCP on pollution, loans, some company just defaulted, as well as anti corruption can be seen as exactly that.


On the off chance that it doesn't and China becomes democratic for some reason, the new president must act.


So either way, one party or another must act.

Ironically, opacity is one of China's strengths in this regard. If a problem can be covered up for long enough that it is resolved before anyone knows about it, the problem might as well not have existed. Kind of like embezzling money from your boss, gambling it in the casinos and winning a huge amount, and then returning the money before the boss notices.

To keep the analogy, if you embezzle, and then gamble, and lose the money, you might be tempted to embezzle some more, in the hope that this time you'll win at the roulette table, and be able to repay everything. This is like rolling over non-performing loans. Maybe it will work out, but it's likely that it will merely compound the problem. The problem will resolve itself when the boss notices, especially if you (in this case, the CCP) are unable to return the money since you've gambled it away. How long before the boss (in this case, capital markets and Chinese taxpayers) notice? And when the boss notices, what will your punishment be?

 

[Hypersonicmissiles]

Yes. In short, China's way of classifying whether a loan is non-performing or not is... not up to American standards. NPLs are not written down (i.e. slashed in value to reflect the likelihood that the loan will never be repaid, which will result in a charge to the bank's P&L), they are rolled over--this should sound familiar to you, because that is what caused the zombie banking system and the lost decade in Japan. Investors do not trust that China's banks are reflecting this, which is why they trade at a discount to book value (very unusual for banks, which usually trade at a slight premium to book value).

Banks have largely resorted to selling off their bad loans to avoid reporting spikes in NPLs, and the buyers of these loans are the "bad bank" asset managers that @Edison Chen has referred to in previous posts in this thread.

Here's the bottom line: can we trust that the Chinese banking regulator and Chinese banks are transparent about this issue, and that the numbers they report are real? If so, then the article above should hold, and China should be able to resolve any stress to the financial system in case of an economic crisis. If not, the Chinese system will blow up, since NPLs were hidden, and the problem may be an order of magnitude larger than the analysts (and the Chinese government) expect.

Here's an article from last year on this issue.

http://online.wsj.com/news/articles/SB10001424052702304355104579235084041750444

Skepticism on China's Nonperforming Loans
Despite Strong Data, Values of Country's Leading Banks Decline in Reflection of Investor Worries About Credit Quality
By
CYNTHIA KOONS
CONNECT
Updated Dec. 3, 2013 10:00 p.m. ET
China's banks are among the world's healthiest and most profitable, based on their financial statements. But investors aren't convinced.

Nonperforming loans account for less than 1% of total loans, a ratio that has been falling in recent years and is now one of the lowest in the world, according to World Bank data. Despite this, price-to-book values of the country's leading banks have been declining over the past few years, reflecting worries about deteriorating credit quality in China.

"People are very skeptical about the [nonperforming-loan] ratios," said Jim Antos, a banking analyst at Mizuho Securities. "The market is saying: 'We just don't trust the credit-quality trends in China.'"
The reason China's bad-debt levels are so low boils down to the tendency of the country's banks to routinely extend or restructure loans to borrowers, or sell them, rather than admit they have gone bad and record a loss in their accounts, analysts say. While the tactic is also used in the West and was a major source of concern during the financial crisis, it is increasingly prevalent in China, where lending has been booming over the past five years. In the U.S., bad loans are 3.9% of total loans.

"There is a culture of rolling things over when they come due at least once, often more," said Charlene Chu, an analyst at Fitch Ratings. In rolling over a loan, a bank can renew the debt or push out the repayment deadline. "In fact, one of the main functions of China's shadow finance system is to provide temporary credit to facilitate rollovers and interest payments," she added.

China's Yingli Green Energy Holding Co., the world's biggest solar- panel maker by sales, is confident it will be able to roll over its debt with Chinese lenders this year, a spokesman said. There is no suggestion that the company is unable to meet its obligations, but it has recorded losses for more than two years as solar-panel prices have fallen amid a glut. Yingli had $1.2 billion in short-term debt outstanding at the end of September, and rolled over about $1.3 billion of debt that was due in 2012, most of which was owed to Chinese banks, according to filings.

The country's regulators discourage banks from rolling over troubled loans, in an effort to ensure that asset-quality data accurately reflects reality. But the sheer volume of loans this year indicates much of the debt in the system is being rolled over, according to Ms. Chu. In China's banking system, 9.5 trillion Chinese yuan ($1.6 trillion) of new loans will have been given out this year, even after repayments are taken into account, by Fitch's estimates.

Fitch predicts that this year, more than 10 trillion yuan of additional credit will be extended through shadow banking, a system of loosely regulated nonbank lenders like trust companies and pawnbrokers. Banks don't disclose data on rolled-over loans.

Banks need a reason to justify rolling over a loan, particularly if a company can't repay it. But there are ways around the hurdle. "If you can demonstrate other banks are willing to provide the loans to repay yours, then that's a justification for a bank to continue giving a loan," Barclays analyst May Yan said.

When they do roll over loans, Chinese banks sometimes do it in creative ways. To skirt restrictions on rolling over loans, banks cooperate with informal lenders that provide bank customers with short-term loans with high interest rates. That borrowing is used to repay a bank loan on the understanding that the bank will issue a new loan two or three weeks later. Such behavior can, in some instances, lead to bigger corporate-debt burdens.

"You look at the data and it just starts to get ridiculous how high some of the debt burdens are and that can't go on into infinity," Fitch's Ms. Chu said. "But over the short term there's nothing to say that this has to end right now and a lot of it comes down to banks' willingness to continue to extend and rollover credit."

China's economic slowdown has started to hurt industries like shipbuilding, steel and solar power, as well as the more developed east coast, home to cities like Beijing and Shanghai. Nonperforming loans in the first six months of 2013 rose 22% on the east coast from the final six months of 2012, while nonperforming loans in the rest of China declined 5%, according to Bernstein Research.

Nonperforming loan ratios have fallen from 22.4% in 2000, but bad debts are rising, as Bernstein's numbers indicate. This comes as the government is working to rein in lending: In October, net local-currency loans extended in China totaled $83 billion, down 36% from September and the lowest monthly figure all year.

Apart from rolling over bad debt, banks have also sold off soured loans to keep their nonperforming-loan ratios low. For instance, in the first half of this year, China's fifth-largest listed bank, Bank of Communications Co.
, sold 5.1 billion yuan (US$837 million) of bad loans to an asset-management company that is designed to buy such loans from banks. Without the sale, the bank's nonperforming-loan ratio would have climbed to 1.15%, rather than the 0.99% the lender reported, said Mike Werner, a Bernstein analyst.

"NPL disposals were the key for Bank of Communications to keep NPL balances in check," Mr. Werner said. Bank of Communications declined to comment.

—Wayne Ma and Dinny McMahon contributed to this article.

Yankee propaganda of the day.

US is facing a massive economic collapse with bubbles everywhere in the bond, stock and property markets.

As long as loans are rolled over, they are not considered NPLs, and thus do not affect a bank's capital stock. That's why rolling over these loans is so insidious, because unless the regulator conducts harsh stress tests against the banks (which it may be doing, but I am unable to follow the Chinese business press), it will be unaware of this problem until it's too late. The NPLs will continue to be rolled over, gradually squeezing out viable businesses as the NPLs are serviced and deadbeat corporations are supported. It is likely the SOEs are primarily responsible for this: banks would happily roll over NPLs for SOEs, since SOEs have an implicit guarantee from the government, so banks feel confident that they will be bailed out in the worst case scenario.

The problem is that if the government has not provisioned for these "hidden" NPLs, then it will cause systemic risk, and possibly systemic failure, in the same way that Iceland's and Ireland's regulators had no idea of the size of the problem until after the crisis had already hit.

That's what I was referring to in my post here (Chinese Economy News & Updates | Page 244 )--can the capital adequacy ratios be trusted, if the NPLs are not being acknowledged?

Since it's all speculation, I tend to trust the regulator, although I remain cautious. That said, there's a reason why investors don't, and until there is more transparency in the system, investors will continue to be very skeptical.



Ironically, opacity is one of China's strengths in this regard. If a problem can be covered up for long enough that it is resolved before anyone knows about it, the problem might as well not have existed. Kind of like embezzling money from your boss, gambling it in the casinos and winning a huge amount, and then returning the money before the boss notices.

To keep the analogy, if you embezzle, and then gamble, and lose the money, you might be tempted to embezzle some more, in the hope that this time you'll win at the roulette table, and be able to repay everything. This is like rolling over non-performing loans. Maybe it will work out, but it's likely that it will merely compound the problem. The problem will resolve itself when the boss notices, especially if you (in this case, the CCP) are unable to return the money since you've gambled it away. How long before the boss (in this case, capital markets and Chinese taxpayers) notice? And when the boss notices, what will your punishment be?

Kid, you have zero knowledge of economics

Reading too much Wall Street Journal is very unhealthy.

To the brainwashed Yankees, they believe their propaganda mouthpieces like religion.

That's why their masturbating dream of 'China collapse' have been wrong for the past 60 years.