- Dec 20, 2009
- Reaction score
- Political Leaning
In a classic case of procrastination, China has been keeping its massive debt crisis at bay by issuing more debt. However, Fitch's Charlene Chu, a leading expert on China's debt, thinks the country's time is up...
Chu's argument is that usually "stress starts in the periphery and moves to the core." Here are five signs that she's right:
1) Plummeting exports in May
A government crackdown on fake trade invoicing likely caused a sharp drop-off in exports, which rose 1 percent year-over-year in May, compared with 14.7 percent in April.... export growth (and economic growth overall) has been much less than China's headline data suggest.
2) The spike in interbank rates continues
Smaller banks are scrambling to get cash. Interbank rates began spiking in early June, when the export invoice crackdown officially began. The immediate cause was the alleged default on mid-tier Everbright Bank's 6 billion yuan loan from Industrial Bank....
3) A crackdown on unsecured loans is imminent
A scheme similar to fake trade invoicing is brewing in short-term bank notes. In Q1 2013, banks issued 670 billion RMB in short-term bank notes, up 198 percent from the same period in 2012. "Over the last couple of years is that banks will kind of invent assets out of thin air in order to create loans," Anne Stevenson-Yang, founder of Beijing-based J Capital Research, explains....
4) Businesses are lying about profits and drowning in debt
The latest report from Caijing says that 71 firms in Guangdong exaggerated their earnings by more than $1 billion combined. And the problem extends beyond Guangdong. "It is an open secret that aside from state revenue, all the other economic data are jellyfish,... corporate debt could amount to as much as 220 percent of the GDP.
5) Local government financing platforms are desperate for loans
China's businesses and local governments aren't bringing in anywhere near enough cash to keep up with debt payments. As a result, local government-affiliated investment vehicles are willing to borrow at rates of 17.5-20 percent and they're padding their balance sheets with fake collateral,...
Just to put that the interbank loan rates in perspective:
China’s central bank removed 2 billion yuan ($326 million) from the money market today, mostly to punish the country’s banks for their shady lending. As a result, banks held onto more of their cash, which sent the two-week and overnight interbank lending rates up 212 and 206 basis points, respectively. Meanwhile, the one-month rate surpassed 7.6%, territory it hasn’t seen since January 2012. To sum that up: Chinese banks think lending to each other for 24 hours is riskier than Portugal’s chance of default on a 10-year bond....