ECON China is carrying $1 trillion in bad debt; at least a sharp slowdown expected

[Housecarl]

For links see article source.....
Posted for fair use.....
http://www.businessinsider.com/china-1-trillion-in-bad-debt-2016-5

China is carrying $1 trillion in bad debt and 'unless this vicious cycle is broken, financial crisis or at least a sharp slowdown is an inevitable ultimate outcome'

Jim Edwards
11h ago
Comments 29

The amount of debt being carried in the Chinese economy — mostly by state-owned "zombie" companies — is now so high that it could lead to a financial crisis, according to Macquarie analyst Viktor Shvets and his team. "Unless this vicious cycle is broken, financial crisis or at least a sharp slowdown is an inevitable ultimate outcome," he wrote in a note to investors on April 29.

The China debt problem is simple, at least in concept. To grow its economy, the Chinese government and its central bank have extended credit generously to all sorts of Chinese companies. Many of those are "state owned enterprises," which are often old-fashioned, uncompetitive, or kept alive by political will rather than economic necessity. These "zombie" companies exist largely to pay back those debts, but as time goes by some of them default, or fail to pay back all if their loans.

This was not much of a problem until recently, Shvets argues, because China's economy was growing so robustly that it eclipsed the rate of non-performing loans (NPLs). But as the economy has grown, so has its debt, to roughly $35 trillion, or nearly 350% of GDP:

http://static1.businessinsider.com/...-459/screen shot 2016-05-01 at 2.32.19 pm.png

If too many companies fail to repay their debts, private lenders and banks will become fearful of lending more. And when that happens, it would plunge China into a financial crisis as liquidity dries up. The size of the debt at risk is so large — and the Chinese economy is such a global driving force — that such a crisis would cause a contagion into the markets of the rest of the world.

We're not there yet, but we're heading there, Shvets writes:

China’s total factor productivity (TFP) growth rates are either close to zero or could have already turned negative. Low or negative productivity implies that to generate desired growth requires leveraging of the economy (~US$3-5 trillion incremental debt for every 5%-6% nominal GDP growth). However, this leads China into a “catch 22” with rising leveraging eroding private sector confidence and leading to further decline in velocity of money (it is already below Japan’s) and hence requiring even more debt, ad infinitum, leading to strong disinflation, decline in ROEs whilst storing debt recognition problems. Unless this vicious cycle is broken, financial crisis or at least a sharp slowdown is an inevitable ultimate outcome.

Here is the size of the Chinese bad debt problem: The rate of non-performing loans is as high as 20%, or $1 trillion, Shvets says:

The build-up of debt is mostly occurring in corporate sector and bulk of that within China’s bloated SOE segment. According to the latest IMF Financial stability report, 590 out of total 2,871 [ie 20%] non-financial companies in its sample (accounting for ~US$400bn of debt) are at risk (i.e. companies are generating lower level of EBITDA relative to interest commitments). Scaling for unlisted and smaller SOEs led the IMF to conclude that loans potentially at risk on commercial bank balance sheets could exceed US$1.3 trillion

... it probably implies that corporate lending at risk could easily be as high as US$1.5-2.0 trillion. If one assumes 50%+ provisioning, then NPLs could be ~US$1 trillion (or ~8%-9% of GDP).

China cannot grow its way out of the problem, as it did in the '80s and '90s, Shvets says, because the economy is slowing and the population of China is aging. There are too few new workers in the economy to create the value needed to grow GDP sufficiently to cover the debt:

Ultimately unless China unhooks itself from its debt-fuelled investment strategy, it would either face a domestic credit crisis or Japan-style lost decade, with accelerated decline in growth rates. Just to remind our younger readers, Japan in late 1980s looked very strong, just prior to its collapse.

 

[Doomer Doug]

Housecarl, China has already collateralized any US Treasury debt it has by being given ownership of US hard assets, roads, bridges, airports, ports etc. They have also been buying up hard assets all over the world, farmland etc in South America, Africa and the US.

The reason China won't have to invade the USA is because they own a lot of it, and what they don't will be given to them in order to pay off the US Treasury bonds they owe.

Internal Chinese debt is another issue, but they will simply shoot anybody who wants to get paid!

 

[Housecarl]

Housecarl, China has already collateralized any US Treasury debt it has by being given ownership of US hard assets, roads, bridges, airports, ports etc. They have also been buying up hard assets all over the world, farmland etc in South America, Africa and the US.

The reason China won't have to invade the USA is because they own a lot of it, and what they don't will be given to them in order to pay off the US Treasury bonds they owe.

Internal Chinese debt is another issue, but they will simply shoot anybody who wants to get paid!

Of course that option only works as long as you've got people willing to do the shooting and people willing to take it.

As to the monetizing of their debt with US hard assets, I recall that didn't work too well for Japan when they did that in the late 1980s and early 1990s.

 

[China Connection]

The main problem over the last few years has been the flood of money and brains out of the country. This I put down to the change in government going back to the old ways of communism.

They have a huge water problem.

The young people do not want to work for small money.

So you have a huge infrastructure in place but the world market is in a huge downturn. The brains in China to a large degree have left.

Places like Vietnam have lover wages and a good workforce.

 

[Old Gray Mare]

So what? The debt is payable in US Federal Reserve Notes. If the FRN inflates to almost or the equivalent intrinsic value of nothing China pays back maybe something in the new gold backed currency they will roll out? Someone tell me where I am wrong? It is the US and the rest of the world dependent on inflated fiat currency that has a huge problem not China. After the collapse China may be sitting in about the same place as the US after WWII. It will have an intact financial system, infrastructure and manufacturing base. Somehow I don't think China will be rolling out a Marshall Plan for the US.

 

[Adino]

There is such a thing as too much debt....especially when that debt isn't collectable. It is a hard lesson for individuals, companies, and even guvs.

As to the discussion of the US paper Chicoms hold, I have said, and am saying again for the record, I do not think the Chinese hold anywhere near as much US Treasury debt (and possibly even cash reserves) as they claim to.

The Chicoms consider finance to be an arena of war so from where I sit you should expect them to operate in it as such. That means they will not share the same weakness they see their enemy have, and that means limiting their exposure to the dethroning of the frn as world currency reserve.

In fact, if I were a gambling man, I'd wager they weighting the Chicoms currently have of US Treasury debt and frn's in their holdings matches what they see our currency's weight will be in the forthcoming SDR.

And if they do not believe we have any (verifiable) gold reserves, my hunch is that they think we will have very little weight in the SDR. As such, they correspondingly, imo, have much, much less US paper than they say they do.

They will make that announcement to the world at a strategically important time, and that time will be when it hurts the US the worst.

The Chicoms intend to go on without us not with us. Period.

 

[Blacknarwhal]

So what? The debt is payable in US Federal Reserve Notes. If the FRN inflates to almost or the equivalent intrinsic value of nothing China pays back maybe something in the new gold backed currency they will roll out? Someone tell me where I am wrong? It is the US and the rest of the world dependent on inflated fiat currency that has a huge problem not China. After the collapse China may be sitting in about the same place as the US after WWII. It will have an intact financial system, infrastructure and manufacturing base. Somehow I don't think China will be rolling out a Marshall Plan for the US.

An intact financial system, infrastructure and manufacturing base. Leave aside the air that's thick enough to be carved into blocks and groundwater that's technically poisonous, but who will China sell to? It's awesome to have a manufacturing base, but its own people aren't buying and if they can't sell abroad, it's kind of like having a fishing pole in Kansas; you have a fully operational fishing industry, but good luck finding fish.

 

[Adino]

So what? The debt is payable in US Federal Reserve Notes. If the FRN inflates to almost or the equivalent intrinsic value of nothing China pays back maybe something in the new gold backed currency they will roll out? Someone tell me where I am wrong? It is the US and the rest of the world dependent on inflated fiat currency that has a huge problem not China. After the collapse China may be sitting in about the same place as the US after WWII. It will have an intact financial system, infrastructure and manufacturing base. Somehow I don't think China will be rolling out a Marshall Plan for the US.

That was not my take away from the op.

What I got is that during the boom years massive loans were made to keep the growth on pace. Now that the global economy has slowed substantially, the Chinese economy has slowed substantially, and now a large number of those loans are unable to be repaid, and that is resulting in large amounts of bad debt.

Bad debt doesn't just go away unless banksters are run out on a rail ala Iceland. So someone is sucking the loss up. And because the amount of bad debt is so large it will effect banks and their ability to extend new credit and a an even larger downward spiral ensues.

That downward spiral and its threat to China as well as the global economy are what the op was about.

At least that was what I got from it.

 

[Medical Maven]

China takes drastic measures to save the regime
APRIL 29, 2016
BY GEORGE FRIEDMAN

http://www.mauldineconomics.com/editorial/china-takes-drastic-measures-to-save-the-regime

Chinese President Xi Jinping recently announced that he would take command of all of China’s armed forces, including the People’s Liberation Army (PLA).
Xi is already chairman of the Central Military Commission that oversees the army. He is now taking a more direct role as head of the new Joint Operations Command Center, which puts him in operational command of the PLA in times of war.

The new title in all likelihood means little in terms of actual command, but it has tremendous political significance. Officially, the Chinese are reforming their military, which is logical (read why here). The roots of this change, however, lie in China’s economic crisis and the need to preserve the regime.

The regime no longer delivers on its promises

Mao Zedong founded China as a moral project: to create a country ruled by communism. After Mao’s death, the project was replaced by another: to modernize the Chinese economy and create prosperity.

The leadership in the new regime rotated in an orderly fashion, and government after government oversaw the generation of increasing wealth.

Mao justified the regime as a dream (or nightmare, depending on how you view Maoism), while his successors promised prosperity, and they delivered.
Until now…

There is occasional talk that China will somehow return to a period of rapid growth and increasing wealth. But the vast outflow of money (some in the hands of private individuals, some taken from government coffers and informally privatized) is the short explanation for why China has reached a new normal.

If the rule is “follow the insiders,” the insiders are saying that getting money out of China is a priority. The story is more complex, of course. If a regime justifies itself by delivering prosperity, and it stops delivering, the regime is in trouble.

China’s problem can no longer be considered primarily economic. That train has left. The economic reality is locked in and will remain in place for a long time.

China is now in the throes of a political challenge

The coastal region will grow at a much slower rate than before, if at all. People who came from the interior for jobs will have to return to the interior.
The interior—a vast and impoverished region—is the population heartland of China. Over 60 percent of China’s population lives there. But the coast is the country’s economic heartland, and that dichotomy defines China’s political problem.
Xi must satisfy both regions, which won’t be easy. The interior wants money for jobs, economic development, and ultimately increased consumption. The only place to get this money from is the coastal region, which obviously does not want to make the transfer.

The coast is economically tied to the United States and Europe, not to the interior. It wants to maintain those links. But the interior is where the majority of Chinese live, and it was the foundation of the Chinese revolution and the regime.

Xi is frightened that the interior will destabilize the regime under economic pressure and that he will lose control over the coastal region, as happened in the 19th century.

These are distant yet rational fears. Xi’s mission is to ensure that the Communist Party keeps China under control. His primary challenge is the inequality among classes and regions that the post-Mao economic surge created.

Xi must have control over the wealthy

The Communist Party came to rule China by exploiting that inequality. If the party can’t solve the problem it has created, it must at least try to control it.
The first step toward control was to impose a dictatorship on the to prevent the emergence of any organized resistance. Today, further liberalization is out of the question, and suppressing any elements that demand it is essential.

The regime also wants to assert control over private assets. Such control is essential if money will be used to quell unhappiness in the interior, and the vast anti-corruption purge is designed to achieve this.

The campaign is not so much aimed at suppressing corruption, although doing so has its uses. Rather, it is designed to intimidate all those who have accumulated wealth. This class must be brought under the control of the party to prevent it from using its wealth to control the party.

The mission set out by Deng Xioping was to “enrich yourself.” Now the fear is that the wealthy have gone too far. The somewhat random and unpredictable purges are intended to frighten the rich.

One result is capital flight, and that is a problem. But the goal is to make wealth subordinate to political power, not the other way around. Otherwise, the party becomes fundamentally weak.

The People’s Liberation Army is the guarantor

Wealth is part of the equation, but in the end, the People’s Liberation Army is the key. It is the ultimate guarantor of the regime in two ways.
First, it has the power to crush opposition, as it did in Tiananmen Square. Second, the children of peasants fill its ranks, and they see enlistment as a path to upward mobility. Taken together, its makeup and power can guarantee the communist regime’s survival.
On the other hand, the PLA is also capable of undermining the regime. Its enormous size might enable it to subvert the party’s power throughout the country.
The party and the PLA had a clear alignment in the past. Now that bond is less certain. The PLA’s officer corps has gotten deeply involved in enriching themselves. The PLA was directly involved in PLA-owned enterprises.
The enterprises have been reduced, but the PLA leadership is still intertwined with Chinese business—either directly or through relatives. The PLA’s size and influence mean that its officers’ interests are torn between the party and the wealthy, which is now under attack.

The regime, however, is reducing PLA’s massive size, which makes good military sense. It also makes political sense. This allows Xi to eliminate those involved in what is now termed corruption, to confiscate their wealth, and to intimidate others.
This purge is similar to those going on in many institutional bureaucracies in China, except that the size and importance of the PLA outstrips all other institutions. A smaller and reconfigured PLA will pose less of a threat to the regime, even if its military efficiency increases.

This transition is dangerous for the party and for Xi. The writing is on the wall for many in the army who have accumulated wealth, but restructuring will take several years.

The PLA will have to be tightly controlled. That is why Xi set up a Discipline Inspection Commission in January specifically for the PLA, answerable directly to the Central Military Commission.

This is also why Xi has taken direct control of military operations. He or his trusted advisors will have direct access to plans and operations. The PLA will come under Xi’s direct supervision.

Any broad conspiracy that includes the PLA will be readily detected. You can’t hide the kinds of troop movements that would pose an existential threat to the regime.
The PLA is the center of gravity of the regime, and if Xi loses control of it, he could lose control of everything. Xi would never have appointed himself head of the Joint Operations Command Center if he hadn’t felt the move absolutely necessary.
He moved to take control of the PLA’s operations to ensure that he could preserve the regime. He put a very different gloss on the action, positioning it as an expansion of his power… and it was.
But it was an expansion compelled by the regime’s insecurity. At first glance, his move should succeed. But there are so many complex and competing interests involved that when Xi pushes on some, others could come loose.

George Friedman
From Wikipedia, the free encyclopedia

George Friedman.
George Friedman is an internationally recognized geopolitical forecaster and strategist on international affairs. He is the Founder and Chairman of Geopolitical Futures, a new online publication that is dedicated to explaining and forecasting the course of global events.[1] Prior to founding Geopolitical Futures, Friedman guided the intellectual vision and was Chairman of Stratfor, the private intelligence publishing and consulting firm he founded in 1996. Friedman resigned from Stratfor in May 2015.[2]

 

[Troke]

One more time; Commies lie, to themselves, to each other and to us. They have no idea what they are doing and neither do we.

Now, as for you folks who are positive that after the dust settles, only China will be standing, you are claiming that gov is efficient and that max gov (Commie gov's) are the most efficient. You really sure about that?

 

[Old Gray Mare]

That was not my take away from the op.

What I got is that during the boom years massive loans were made to keep the growth on pace. Now that the global economy has slowed substantially, the Chinese economy has slowed substantially, and now a large number of those loans are unable to be repaid, and that is resulting in large amounts of bad debt.

Bad debt doesn't just go away unless banksters are run out on a rail ala Iceland. So someone is sucking the loss up. And because the amount of bad debt is so large it will effect banks and their ability to extend new credit and a an even larger downward spiral ensues.

That downward spiral and its threat to China as well as the global economy are what the op was about.

At least that was what I got from it.

Thank you for your reply. My question still stands. I do not see the collapse of the western fiat currencies as much of a threat to China as much as I see it as a buying opportunity for China. A gold back currency can come into the countries with the failing fiat currencies and buy up income producing assets at fire sale prices. The debt is priced in FRNs. If the FRN becomes next to worthless or worthless and China's currency is backed by gold don't you see the possibility of a repeat of something like the Wiemar Republic? Peter Schiff predicted this ages ago. It looks like it is now getting ready to happen.

China has not been buying up all the gold it can just because it is pretty.

 

[Adino]

OGM, the Chinese think and plan for centuries and millennia, not in days, weeks, months, or even years.

If you examine their history you will see that in times of war they have many times built temporary infrastructure (walls, etc) that they intended for show or strategic importance knowing full well they or their enemies would burn down the temporary installments. The purpose in the strategy has been to buy time, to keep the populous occupied, to keep the enemy confused as to what they are really up to.

This is just my own opinion, but I do not believe Chicom leadership has ever had any intention of peacefully coexisting w/ the west for the next 1,000 years. They intend to be the world power. Every bridge and institution they have built w/ the west they have built just like the fake walls the Mongol hordes thought were real, but found out later were not walls at all but corralling devices to get the Mongols to mass where the Chinese wanted them to so that they could be properly slaughtered.

I see the 'embracing' of capitalism and western financial institutions the same way I see the fake walls China built to 'keep out' the Mongol horde.

I think they have put at risk in doing business with the west only that which they are willing to sacrifice to take us down. And I think they will let every iron they have left in the fire burn up and evaporate w/ everything else that will burn when the west's financial system finally implodes.

In short, it will hurt China when we go down. And it will hurt them a lot. But they will hum Glroia Gaynor 'I will survive' and move on. It may cause 30-40% of their people to be thrown into unemployment and destroy the current version of the economy they have. It may cause massive civil unrest and the death of millions of Chinese for the Chicoms to maintain control. But look what they were willing to do to their own people in the last century.

There is no sacrifice too big for the Chinese or the world to make for the Chicom leadership, as long as their 1,000 year plan is still intact.

Just like the core of their regime and its resources were hidden and protected from the Mongols they will do the same here and now.

It will be devastating to them but they think the party will survive intact and do so long enough to make sure when they start to rise again they are the first shoulders up.

Now, that's not how my Bible reads things go for them. But these are the conclusions my study has brought me to.

 

[Medical Maven]

Adino,

I think biowarfare will be a big part of what they want to do when things go hot. If they can't save The United States for colonization, they will eradicate the native populations in Africa and South America for colonization with biological agents. It will be so easy to do. It will probably be necessary to use a lot of nukes on the continental U.S. Eventually, in a few hundred years they could try colonizing the U.S.

For the Han Chinese any other human is subhuman, not worth saving.

Han Chinese (also called Han) (simplified Chinese: 汉族; traditional Chinese: 漢族; pinyin: hàn zú) is an ethnic group from China. 90% of the people living in China and more than 97% of the people in Taiwan are Han. Out of the entire human population in the world, 19% are Han.

 

[Adino]

I agree MM. On all counts.

No price is too high for the rest of the world to pay.

But, in all honesty, it is the Anglo-Saxon chickens coming home to roost after what has been done by the west to the Chinese in the last several hundred years.

A real fustercluck all around.

 

[Medical Maven]

I agree MM. On all counts.

No price is too high for the rest of the world to pay.

But, in all honesty, it is the Anglo-Saxon chickens coming home to roost after what has been done by the west to the Chinese in the last several hundred years.

A real fustercluck all around.

The big difference is that we do not want to exterminate them. We want to coexist. We may have screwed them over in the 19th century colonial past, but they allowed that to happen through internal disorder and ossification.

 

[Adino]

Which 'we' are you referring to?

The citizens of the west or the west's oligarchies?

I don't think American citizens want Chinese citizens dead anymore than the reverse.

In the Outlaw Josey Wales Josie and Ten Bears meet to discuss the arrival of the whites out west and they make the observation that people can live together and be trustworthy but guvs cannot.

Sweet logic.

Our guvs have mistreated their own citizens and other guvs with equal abandon. It is in their nature as they are usually run by the greedy and power hungry.

When discussing guvs and banksters there is little room for good guy hats to be found anywhere in the room.

 

[Medical Maven]

Which 'we' are you referring to?

The citizens of the west or the west's oligarchies?

I don't think American citizens want Chinese citizens dead anymore than the reverse.

In the Outlaw Josey Wales Josie and Ten Bears meet to discuss the arrival of the whites out west and they make the observation that people can live together and be trustworthy but guvs cannot.

Sweet logic.

Our guvs have mistreated their own citizens and other guvs with equal abandon. It is in their nature as they are usually run by the greedy and power hungry.

When discussing guvs and banksters there is little room for good guy hats to be found anywhere in the room.

Agreed. I was using "we" loosely. But that is the way it has always been. The greedy, power hungry psychopaths generally rise to the top. That is the nature of things.

 

[Adino]

Sux, donut?