The recent bloodbath in financial stocks, especially of major European banks, has led to a renewed concern over China's own stressed banking sector.
Hedge fund manager Kyle Bass, who has become perhaps the most famous yuan bear since George Soros' now-celebrated broadside against the Chinese economy last month, bases his bet of a massive RMB devaluation on the staggering costs that Beijing will incur to rescue its banks from bad loans, to the tune of at least US$3.5 trillion, if not far more.
Other recent mind-boggling estimates have been in the range of $5 to $8 trillion for a comprehensive recapitalization of the Chinese banking system.
Other recent mind-boggling estimates have been in the range of $5 to $8 trillion for a comprehensive recapitalization of the Chinese banking system.
How plausible are these Apocalyptic figures?
The $3.5 trillion is based on a non-performing loan (NPL) ratio of 10 percent of China's total banking assets of $34.5 trillion (though according to this official report, it's actually $29.7 trillion as of end-2015). According to Mr. Bass, this is a conservative estimate considering past NPL cycles in Chinese history - he is referring to the late-1990s cycle in the run-up to China's accession to the WTO, in which the NPL ratio was widely believed to be 25 to 40 percent. China grew out of that funk - the hope in Beijing today is that it will grow out of the present one, as well.
Only a small minority believes the official statistic that merely 1.6 percent of outstanding Chinese loans are currently non-performing; Chinese banks themselves, especially smaller or private banks without implicit guarantees against failure enjoyed by their large state-backed counterparts, do in fact price in a ratio of about 10 percent in their risk assessments for lending. But other unofficial estimates range anywhere from 6 to over 21 percent - a stunningly wide range for what's arguably one of the most critical metrics as far as the stability of the global financial system is concerned.
Only a small minority believes the official statistic that merely 1.6 percent of outstanding Chinese loans are currently non-performing; Chinese banks themselves, especially smaller or private banks without implicit guarantees against failure enjoyed by their large state-backed counterparts, do in fact price in a ratio of about 10 percent in their risk assessments for lending. But other unofficial estimates range anywhere from 6 to over 21 percent - a stunningly wide range for what's arguably one of the most critical metrics as far as the stability of the global financial system is concerned.
No doubt this uncertainty about the actual health of Chinese banks is becoming one of the great big questions hanging over markets on every continent and in practically every country - as Fed chair Janet Yellen has again singled out China as the main international concern for US monetary policy in her latest testimony to Congress.
But like so many other Western experts, Mr. Bass clearly misunderstands China: it's an Asian autocracy, not a Western democracy. Those who consider him a prophet for forecasting the US subprime mortgage crisis in 2007 are quickly countered by those who point out how badly his prediction that Japanese bonds would meltdown in 2010 turned out. There's good reason to believe that on China, his Asian misinterpretation will be repeated, rather than his Western prescience. If Japan is an Oriental command-and-control system that defies the logic of Western markets, China is far more so.
Per a late-2014 report by Chinese government-linked researchers, the country wasted $6.9 trillion of investment from 2009 thru 2013 - that's right, US$6.9 TRILLION?!
That translates to a non-performing loan ratio approaching 50 percent for the stimulus-steroid-boosted years 2009-2013.
In a Western system, such staggering losses would have triggered a complete financial catastrophe by now. Not so in China - the money was, for the most part, simply pocketed by corrupt officials and their crony entrepreneurs, and showed up dramatically in the rest of the economy, but most obviously in the astronomical real estate bubble that has made housing unaffordable for ordinary Chinese.
Mr. Xi Jinping and co. are now attempting to massively redistribute these ill-gotten gains from the ruling elite to the masses - before it all flies out of the country. This means more dictatorship, not less - more state intervention, not less.
China's a basket case alright - even more so than the stubbornest bears would have it. For this very reason, they're likely to be frustrated.
Per a late-2014 report by Chinese government-linked researchers, the country wasted $6.9 trillion of investment from 2009 thru 2013 - that's right, US$6.9 TRILLION?!
That translates to a non-performing loan ratio approaching 50 percent for the stimulus-steroid-boosted years 2009-2013.
In a Western system, such staggering losses would have triggered a complete financial catastrophe by now. Not so in China - the money was, for the most part, simply pocketed by corrupt officials and their crony entrepreneurs, and showed up dramatically in the rest of the economy, but most obviously in the astronomical real estate bubble that has made housing unaffordable for ordinary Chinese.
Mr. Xi Jinping and co. are now attempting to massively redistribute these ill-gotten gains from the ruling elite to the masses - before it all flies out of the country. This means more dictatorship, not less - more state intervention, not less.
China's a basket case alright - even more so than the stubbornest bears would have it. For this very reason, they're likely to be frustrated.
No comments:
Post a Comment