20 ms·

China's Subprime Crisis Is Here

258 points by RaSoJo 11y ago

obblekk 11y ago
This doesn't seem like a particularly compelling argument. Bad loan volumes have risen, but not above historical highs. As a percentage of total debt, the article says bad debt is at 1.67%. This is up 51% from 1.25% in the last year. Considering the amount of margin that's been wiped out as a result of the stock bubble popping, this doesn't seem terrible. In addition, it doesn't seem like this rate is accelerating (since 2009), but linearly increasing. Maybe Chinese banks are consistently increasing the amount of debt they issue and the risk they take per unit debt as a rational response to increasing productivity of Chinese businesses. This implies a greater amount of leverage for the Chinese economy, but not necessarily extreme irrationality. Maybe there's something here (I actually think there are structural problems in the Chinese economy) but this article does not make a compelling case.
- dh997 11y ago
  Isn't the bigger issues China's structural draconian limits to freer movement of capital, external investment, the imaginary/real value of ghost cities and scale of holding illiquid foreign debt?
  - obblekk 11y ago
    One by one: 1. Freer movement of capital. This is a false herring in my opinion. Virtually no countries outside the US/EU offer completely free movement of money. The thing that matters is whether this prevents foreign capital investment (because people are scared of not being able to get their money back). In China, I don't think it does based on the last few decades of foreign investment. 2. External investment. As above, I don't think people are discouraged by the rules. Yes, you have to make a 50% joint venture, bribe government officials, share technology, have no copyright/IP protection, and risk your partner entering the market as a competitor once they learn your business (see Asus). But, you can still make so much money that it's probably worth it (or so American corporations seem to believe). 3. Ghost cities. I don't know much about this one honestly. I've been hearing about this since 2009, but consider that China is increasing their urbanization rate by 1 percentage point per year (~10M people/yr). If I were asked to manage that as a central planner, having excess inventory of housing would be critical to prevent slowdowns and allowing for some burstiness. Yeah, there's probably ghost cities, but how long do they remain before becoming occupied. Are the same cities hanging around forever (and people complaining about them forever), or is it new stock every year? 4. Illiquid foreign debt. Most of China's debt is in two categories: 1) Popular debt (US/EU) or 2) strategically important countries. For (1), there's likely some market. You're right that they can't sell too much, but they've already notified the world that they will begin selling their holdings over the next decade and since central banks in the western world are trying to increase the reserve interest rate there should be people willing to buy this stuff (or the government can buy it and reissue at a higher interest rate to make people want it). For (2), don't think of it as debt, but operating expense, never to be recovered.
    - tyre 11y ago
      A few counterpoints. From your original comment > In addition, it doesn't seem like this rate is accelerating (since 2009), but linearly increasing. That is the overall percentage of bad debt increasing linearly, meaning accumulation of bad debt is accelerating faster than growth of "good" debt. This was also the case in the US mortgage crisis. From this comment 1) It would be less of a concern if China had less liquidity while Chinese companies were also getting less access to liquidity. Shadow lending from wealth management product (WMPs) is a massive structural issue for the Chinese economy. When the underlying assets fail, you have a recession. It also means a centralized economy with lots of the downsides (bribes, joint ventures, etc.) but without the control. 2) American corporations believe there is tons of money to be made, but not many have been successful. In the event of a Chinese recession, those experiments will be vastly drawn back when Chinese consumers become pessimistic. In the event of an American correction, they'll pull back to invest in proven markets. 3) I haven't seen evidence that these ghost cities are the result of central planners building slack for expected growth. 4) Internal private debt (see 1) is a much larger problem. Most of that is owned by the central government, which means either a bailout when companies fail, continued lending until a bailout, or letting their economy correct.
      - obblekk 11y ago
        Linearly increasing: True. I misread the axis. It still doesn't seem to have the form of something in a bubble or clearly unsustainable. 1. That's a fair point. But I suspect this has more to do with less developed capital markets in China than systematic weakness. I wonder if local supply of capital will be able to step up in the next American recession. 2. I think many have been successful in lowering their manufacturing costs. Not sure how an American correction would affect the Chinese economy. 3. Fair. 4. I'm generally skeptical of this argument. US corporations and households have maintained a high level of debt for more than 50 years without significant effect. I guess the Federal gov hasn't been the holder of that debt, but it actually seems better that way because they have the ability to print cash and add a stabilizing effect. I guess my point is that none of these individually seem extreme enough to cause a problem. Maybe in aggregate there could be a storm.
  - obblekk 11y ago
    I think the bigger issue is that China faces labor competition on the lower end of the unskilled market from South East Asia and India and is trying to enter the lower end of the skilled labor market but finding out that the Americans, Europeans, and Israelis are fairly competitive. I'm generalizing and neither list of countries is exhaustive.
    - jcoffland 11y ago
      China is miles ahead of South East Asia and much of India. Chinese tourists go to places like Vietnam and are seen as wealthy and sophisticated by the locals. From the Western perspective it may seem like China, SEA and India are on a level playing field but that is far from the truth.
      - seanmcdirmid 11y ago
        Bangkok is a much more cosmopolitan city than Beijing or even Shanghai. I get the feeling that Thailand is a bit richer than China per capita. That's about it though.
        dh997 11y ago
        Beijing takes the cake for both craziest bus drivers and bicyclists, beating Hanoi and Davis, CA.
        seanmcdirmid 11y ago
        This is so true. No matter what city I go to (Manila? Bangkok? Delhi? Kunming? Changsha?), it never feels as bad as home.
- yueq 11y ago
  The number is not that bad. Comparing to US Bank Nonperforming loans ratio, Quarter Total Loans Nonperforming Perc 2013 Q1 7,658,238,093,000 261,202,393,000 3.41 2013 Q2 7,732,341,313,000 239,430,499,000 3.10 2013 Q3 7,802,034,024,000 221,209,596,000 2.84 2013 Q4 7,893,109,125,000 207,256,779,000 2.63 2014 Q1 7,930,820,793,000 195,236,127,000 2.46 2014 Q2 8,109,181,723,000 181,567,784,000 2.24 2014 Q3 8,160,095,554,000 171,922,840,000 2.11 2014 Q4 8,309,545,800,000 162,654,076,000 1.96 2015 Q1 8,362,016,000,000 152,966,093,000 1.83 2015 Q2 8,546,950,627,000 144,686,145,000 1.69 2015 Q3 8,642,299,288,000 139,164,401,000 1.61 2015 Q4 8,839,565,653,000 137,835,965,000 1.56 Source: http://www.bankregdata.com/allAQmet.asp?met=NPL http://www.bankregdata.com/allAQmet.asp?met=NPL
tim333 11y ago
China's situation is a bit different to the US's in that given it's socialist leanings it will probably just keep lending and bailing out.
- themagician 11y ago
  How is that different from the US situation? Isn't that exactly the US situation?
  - tyre 11y ago
    Yes, basically. Home owners were given mortgages they couldn't afford except under beyond-ideal circumstances. They then would refinance and take out other mortgages, until the whole house of cards came down. The Saudis could maybe handle a situation like this, given their natural resources. As the current price of oil has shown, however, being rich in natural resources has its own issues. The same principles apply across China, Saudi Arabia, and startups: at a certain point, you have to make money.
- Outdoorsman 11y ago
  Good point... I would have to believe that within China there are many brilliant economists who knew that their "expansion" could not continue forever... Further, I think government officials were informed of the same... We have a vague idea of their "reserves"...that vagueness is a bit troubling...
greggarious 11y ago
Assuming this headline is correct, what effects would that have on the global economy?
- ktRolster 11y ago
  Probably small. China's financial system isn't entwined with the US/European system as much (the Fed buys bonds from the ECB, and vice versa). Commodities will be hit the hardest, because China will stop importing them. Alan S Blinder estimated that a very severe recession in China would affect the US GDP by .2% So that kind of gives you an idea.
  - nickgrosvenor 11y ago
    Famous last words, we live in a global economy now.
  - jcoffland 11y ago
    China holds more US treasury bonds than any other country. How are we not intertwined?
    - roel_v 11y ago
      You've been saying that across this thread, but let's say that Chinese banks start to go bankrupt because of nonperforming loans. The Chinese central bank holds large amounts of US treasury bonds. What would be the effect of the bankruptcies? A sell-off to bail out Chinese banks? How would that work; they'd get dollars for their tbonds; then what? Would it depress tbond yields? They can't go much further before you have to pay to hold them... I don't understand the reasoning behind the 'but the Chinese hold lots of US debt!' argument. This isn't like a mortgage where the lender can call in the loan at any point, and if you don't pay they'll repossess your house; or a loan from a loan shark who'll break your kneecaps if you don't pay up. What would happen with or because of these debts?
      - jcoffland 11y ago
narrator 11y ago
Ahhh the old' China crisis again! The dog that didn't bark. The Charlie Brown football that never got kicked. The constant and unending crisis that is on its way any day now. As I have explained over the years in many previous comments, China's banking system is partially privatized central planning, the government prints it's own money. Thus, when there is a credit crisis the government just recapitalizes the banks with freshly printed Yuan and sells off the bad loans at a discount. Bankers who behaved badly get executed or disappeared and the whole thing starts over. Don't believe me? Let's take a trip down memory lane on HN: China: Crisis Gauge Rises to Record High 2 points Cless 2 years ago 0 comments (http://www.bloomberg.com/news/2014-02-26/crisis-gauge-rises-to-record-high-as-swaps-avoided.html http://www.bloomberg.com/news/2014-02-26/crisis-gauge-rises-...) China Interbank Rates at Record High (think Lehman Bros.) 1 points teawithcarl 3 years ago 0 comments (http://m.theepochtimes.com/n3/118747-china-banking-crisis-interbank-rates-at-record/ http://m.theepochtimes.com/n3/118747-china-banking-crisis-in...) China's Brewing Crisis Is a Thousand Times Greece's 8 points ytNumbers 6 months ago 4 comments (http://www.forbes.com/sites/panosmourdoukoutas/2015/08/25/chinas-brewing-crisis-is-a-thousand-times-greeces/ http://www.forbes.com/sites/panosmourdoukoutas/2015/08/25/ch...) Skyscraper index points to elevated risk of financial crisis in China, India 2 points cs702 4 years ago 0 comments (http://www.scribd.com/doc/78470886/Index-Bubble-Building-100112-2-1-14300620 http://www.scribd.com/doc/78470886/Index-Bubble-Building-100...) China fears bond crisis as it slams quantitative easing 1 points chaostheory 7 years ago 0 comments (http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5286832/China-fears-bond-crisis-as-it-slams-quantitative-easing.html http://www.telegraph.co.uk/finance/newsbysector/banksandfina...) China hit hardest by US Downgrade 2 points ca136 5 years ago 0 comments (http://gulfnews.com/opinions/editorials/us-crisis-hits-china-hardest-1.848525 http://gulfnews.com/opinions/editorials/us-crisis-hits-china...) China’s Coming Economic Crisis? 3 points kercker 2 years ago 0 comments (http://www.nytimes.com/roomfordebate/2014/04/08/chinas-coming-economic-crisis?hp&rref=opinion http://www.nytimes.com/roomfordebate/2014/04/08/chinas-comin...) Why China Will Have an Economic Crisis 1 points eande 4 years ago 0 comments (http://business.time.com/2012/02/27/why-china-will-have-an-economic-crisis/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+time%2Fbusiness+%28TIME%3A+Top+Business+Stories%29 http://business.time.com/2012/02/27/why-china-will-have-an-e...) Confidence of China VCs drops to new low 2 points ilamont 7 years ago 0 comments (http://www.thestandard.com/news/2008/10/29/global-economic-crisis-drives-china-vc-confidence-new-low http://www.thestandard.com/news/2008/10/29/global-economic-c...)
gesman 11y ago
I think mr. Madoff need to be let out of jail to educate Chinese government.
melted 11y ago
FWIW, George Friedman (of STRATFOR) predicted this, except he believed the implosion of China would be on a truly catastrophic scale. So they could still be at the edge of a much deeper hole. See: The Next 100 Years: A Forecast for the 21st Century https://www.amazon.com/dp/0767923057 https://www.amazon.com/dp/0767923057
- jqm 11y ago
  He also predicted Mexico and Poland would become world powers soon. Although there are some interesting insights, I take his predictions with a whole shaker of salt.
  - melted 11y ago
    Not really "soon" — more like towards the middle of the century for Poland, and end of the century for Mexico. I'm curious about his predictions on Russia and Turkey in particular.
sharetea 11y ago
This article is good, but it underscores how fast and catastrophic China's collapse is. - China's total debt risen to 346% of GDP in 2015. http://seekingalpha.com/article/3852886-chinese-debt-problem-stay http://seekingalpha.com/article/3852886-chinese-debt-problem... - China exports fall 11.2% in January, imports down 18.8% http://www.cnbc.com/2016/02/14/china-releases-trade-data-for-january-yuan-denominated-and-us-dollar-imports-and-exports.html http://www.cnbc.com/2016/02/14/china-releases-trade-data-for... - China’s $6.7 trillion bond market is flashing the same danger signs that triggered a tumble in stocks http://www.thestar.com.my/business/business-news/2015/10/10/if-you-think-chinas-equity-bubble-is-scary-check-out-bonds/?style=biz http://www.thestar.com.my/business/business-news/2015/10/10/... - China Capital Outflows Rise to Estimated $1 Trillion in 2015 http://www.bloomberg.com/news/articles/2016-01-25/china-capital-outflows-climb-to-estimated-1-trillion-in-2015 http://www.bloomberg.com/news/articles/2016-01-25/china-capi... - China's Net Capital Outflows Probably Hit $113 Billion In January http://www.actionforex.com/analysis/daily-forex-fundamentals/china's-net-capital-outflows-probably-hit-$113-billion-in-january:-iif-20160210257745/ http://www.actionforex.com/analysis/daily-forex-fundamentals... - "Chinese banks will lose approximately $3.5 trillion of equity if China's banking system loses 10 percent of assets" (all of its reserve would be gone) http://www.cnbc.com/2016/02/10/kyle-bass-china-banks-may-lose-5-times-us-banks-subprime-losses-in-credit-crisis.html http://www.cnbc.com/2016/02/10/kyle-bass-china-banks-may-los...
yueq 11y ago
The root cause of 08 financial crisis is not simply 'subprime loans' that can't be repaid. It's because of trillions of derivatives that those banks hold, and lack of liquidity when banks are making wrong bet. China doesn't have many complex financial engineerings as US did in 07/08.
- slantedview 11y ago
  It was broader than subprime and derivatives even. It was a general real estate (housing) bubble. Home prices became massively inflated and the various investments tied to housing came crashing down. A similar result can be expected in China when the music eventually stops.
  - yueq 11y ago
    When price go up it doesn't mean a it's a bubble. Getting loans is way harder/regulated in China than 06/07 US. Currently 25+% down payment or 70% for 2nd home is required. -- Comparing in 2007 banks only asks for 3% down.
    - viblo 11y ago
      China have aggressively lowered the requirements the last years. At the moment it should be 20% for first and 30% for 2nd home. Still some way to go for US levels ofc. www.mingtiandi.com/real-estate/china-real-estate-research-policy/china-lowered-downpayments-but-will-it-help-sell-homes-in-the-hinterland/
    - slantedview 11y ago
      Prices going up for no good reason (increase in demand or decrease in supply) means there is a bubble. This is what happened in the US. Bubbles are the cause of speculation, such as building cities that sit empty.
  - shostack 11y ago
    Any thoughts on what that will mean for the US real estate market given continued Chinese investment here? My current guess is we'll see more money pour in as people attempt to shelter their Chinese funds.
jernigan 11y ago
Fear of Women’s Chest lead to the Discovery of Stethoscope: Rene Laennec.. http://goo.gl/P7xc2s http://goo.gl/P7xc2s
jcoffland 11y ago
The American media seems to jump at any opportunity to dismiss China as an economic threat. It makes us feel more secure but leads to a public informed only about one side of China's story. Namely the part our ego can handle. China has regularly surpassed the US in number of cars sold since 2009. China also holds more US debt than any other country. Another way to put that is the US government owes China over 1 trillion USD. This, I believe, is the real reason the American media trips over themselves to write stories that sooth away the nagging fear that China is, or even already has surpassed us economically. Edit: more interesting facts. - China's percent GDP growth is more than twice that of the US. (7.4% vs 2.4% in 2015) - China's government has $3.9T in cash reserves vs the US' $434B. - China has twice as many children enrolled in primary and secondary school and 50% more undergrads than the US. We can only say but, but, but for so long.
- fasteddie 11y ago
  US treasuries are at historically low rates -- if China dumped 'em all it probably wouldn't move the needle that much. And the reason they hold so many is not as some control play against the US -- its because it was the best way to devalue their currency enough to support exports.
  - jcoffland 11y ago
    How it looks depends a lot on your bias. The fact remains that China can soak up $1T of US liquidity.
    - Golf_Hotel_Mike 11y ago
      Yes, they 'can' soak up $1T of liquidity the way I 'can' lock myself into my house and set it on fire. Common sense suggests they will never actually do so.
    - abduhl 11y ago
      I'm not very familiar with this issue but could you please explain how China can soak up $1T of LIQUIDITY when most of this $1T is, as I understand it, in bonds. Wouldn't this debt being in bonds mean that 1) there is a schedule of payments that have already been accounted for in the budget and 2) that they cannot "call in" the debt? Certainly China could refuse to buy additional bonds that we put out which may impact liquidity but there are always buyers for US debt - Japan was the largest foreign holder of US debt just last year.
einar2812 11y ago
Is it right that China owns a lot of its own debt AND a lot of US debt as well? And also heard that China supposedly has the largest gold reserves in the world, dwarfing any other country in comparison. Could that count for something?
- foxhedgehog 11y ago
  They would probably have to spend at least a good chunk their dollar reserves in order to manage a truly catastrophic currency decline.
hgh 11y ago
Michael Pettis is one my favourite China commentators, with a big focus on the shifts necessary in the balance sheet and composition of growth, and whether that can be done smoothly or necessarily through some catastrophe. Not to mention a broader view of the political economy of the change. Here's a recent post he did that's worth a read (at least through the nine point summary): http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-reforms-help-china/ http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-...
- welanes 11y ago
  Pettis is the man. Essential reading for understanding China's economy.
JumpCrisscross 11y ago
There's a conjecture, in economics, that out of a fixed exchange rates, free capital flows and a sovereign monetary policy, a country can only pick two. This is known as the Impossible Trinity [1]. The United States plays strategy b, relinquishing a fixed exchange rate. Greece plays a, trading away its monetary-policy sovereignty within the eurozone. China is trying to move from c (ex free capital flows) to b (ex fixed exchange rates). In the process, it's caught in the Impossible Trinity. Either coördinated decisiveness or some combination of a currency and/or capital-outflow will force them into a stable configuration. [1] https://en.m.wikipedia.org/wiki/Impossible_trinity https://en.m.wikipedia.org/wiki/Impossible_trinity
zcbenz 11y ago
If you keep saying China has economic crisis, finally you are gonna be right some day.
- foxhedgehog 11y ago
  That, or you were finally right last summer.
- seanmcdirmid 11y ago
  There should have been a crisis a few years ago but the government has chosen to keep the bubbles from popping. $1 million for a 90 sqm apartment in Beijing that rents form $1500/month is pretty frothy. But the CPC repealed the law of gravity, so it doesn't apply to the Chinese economy. Maybe it's really different this time. But probably not. The only question now: will they inflate the currency turning all those savers into losers, or reign in credit and bad debts, choking the economy and growth. They won't be able to just hide behind growth now.
foxhedgehog 11y ago
One factor not discussed in this article is the demographic headwinds that China is heading into. Their one child policy is only now resulting in greatly distorted working age ratios, which means that their non-working elderly population is increasing faster than the population of workers to support them. With a safety net in place that relies heavily on existing familial structures rather than government programs, there are reasons to be concerned about declining aggregate demand over the next several years, precisely as China is trying hardest to transition from export-led growth to a larger, domestically-focused economy.
jorgecurio 11y ago
Everytime a piece about china is posted the comments are quickly the same in tone, "oh but China already surpassed US" uh no it fucking didn't not even close. Especially when the Chinese minister admitted China's GDP is complete fiction. Nobody in China even knows the score because it's super tough with all the corruption to get anything done with accuracy. It's like there's no room for a China that is fallible. China is perfect the all knowing all seeing for these crowd. China is the future they claim. Not with that ugly ass communist nanny state system suppressing free speech and censoring media you don't.
dharma1 11y ago
At some point, some percentage of those loans will default. Financially China can handle it, though when those loans default, the chain of events will also have some global consequences. The question is, when the loans do default, and with it some effects to the real economy/people, what happens to the public perception of the government in China? There is a good chance of social unrest
maolt 11y ago
Having lived in Beijing for 3 years, I try to pay more attention to the country's "hidden" or at least somewhat non obvious debts. The Chinese soil is dying or dead. The population as a whole and the younger generations in particular are facing future health issues of cataclysmic proportions. The pace at which the country moves is sure to leave dozen of millions of people in the dust. Those already left in the dust endure, because their living conditions are better than those of their parents. Yet their kids' might not be, and they will choose to endure or not (and vent in a way they think appropriate). That, added to the dearth of females, and the Confucianist view of a man's place in society are already proving explosive. China has a lot of potential, but it also faces challenges of epic proportions. To me, the economic problems are more a symptom of the problem rather than the problem to worry about.

258 points by RaSoJo 11y ago

This doesn't seem like a particularly compelling argument. Bad loan volumes have risen, but not above historical highs. As a percentage of total debt, the article says bad debt is at 1.67%. This is up 51% from 1.25% in the last year. Considering the amount of margin that's been wiped out as a result of the stock bubble popping, this doesn't seem terrible. In addition, it doesn't seem like this rate is accelerating (since 2009), but linearly increasing. Maybe Chinese banks are consistently increasing the amount of debt they issue and the risk they take per unit debt as a rational response to increasing productivity of Chinese businesses. This implies a greater amount of leverage for the Chinese economy, but not necessarily extreme irrationality. Maybe there's something here (I actually think there are structural problems in the Chinese economy) but this article does not make a compelling case.

dh997 11y ago
Isn't the bigger issues China's structural draconian limits to freer movement of capital, external investment, the imaginary/real value of ghost cities and scale of holding illiquid foreign debt?
- obblekk 11y ago
  One by one: 1. Freer movement of capital. This is a false herring in my opinion. Virtually no countries outside the US/EU offer completely free movement of money. The thing that matters is whether this prevents foreign capital investment (because people are scared of not being able to get their money back). In China, I don't think it does based on the last few decades of foreign investment. 2. External investment. As above, I don't think people are discouraged by the rules. Yes, you have to make a 50% joint venture, bribe government officials, share technology, have no copyright/IP protection, and risk your partner entering the market as a competitor once they learn your business (see Asus). But, you can still make so much money that it's probably worth it (or so American corporations seem to believe). 3. Ghost cities. I don't know much about this one honestly. I've been hearing about this since 2009, but consider that China is increasing their urbanization rate by 1 percentage point per year (~10M people/yr). If I were asked to manage that as a central planner, having excess inventory of housing would be critical to prevent slowdowns and allowing for some burstiness. Yeah, there's probably ghost cities, but how long do they remain before becoming occupied. Are the same cities hanging around forever (and people complaining about them forever), or is it new stock every year? 4. Illiquid foreign debt. Most of China's debt is in two categories: 1) Popular debt (US/EU) or 2) strategically important countries. For (1), there's likely some market. You're right that they can't sell too much, but they've already notified the world that they will begin selling their holdings over the next decade and since central banks in the western world are trying to increase the reserve interest rate there should be people willing to buy this stuff (or the government can buy it and reissue at a higher interest rate to make people want it). For (2), don't think of it as debt, but operating expense, never to be recovered.
  - tyre 11y ago
    A few counterpoints. From your original comment > In addition, it doesn't seem like this rate is accelerating (since 2009), but linearly increasing. That is the overall percentage of bad debt increasing linearly, meaning accumulation of bad debt is accelerating faster than growth of "good" debt. This was also the case in the US mortgage crisis. From this comment 1) It would be less of a concern if China had less liquidity while Chinese companies were also getting less access to liquidity. Shadow lending from wealth management product (WMPs) is a massive structural issue for the Chinese economy. When the underlying assets fail, you have a recession. It also means a centralized economy with lots of the downsides (bribes, joint ventures, etc.) but without the control. 2) American corporations believe there is tons of money to be made, but not many have been successful. In the event of a Chinese recession, those experiments will be vastly drawn back when Chinese consumers become pessimistic. In the event of an American correction, they'll pull back to invest in proven markets. 3) I haven't seen evidence that these ghost cities are the result of central planners building slack for expected growth. 4) Internal private debt (see 1) is a much larger problem. Most of that is owned by the central government, which means either a bailout when companies fail, continued lending until a bailout, or letting their economy correct.
    - obblekk 11y ago
      Linearly increasing: True. I misread the axis. It still doesn't seem to have the form of something in a bubble or clearly unsustainable. 1. That's a fair point. But I suspect this has more to do with less developed capital markets in China than systematic weakness. I wonder if local supply of capital will be able to step up in the next American recession. 2. I think many have been successful in lowering their manufacturing costs. Not sure how an American correction would affect the Chinese economy. 3. Fair. 4. I'm generally skeptical of this argument. US corporations and households have maintained a high level of debt for more than 50 years without significant effect. I guess the Federal gov hasn't been the holder of that debt, but it actually seems better that way because they have the ability to print cash and add a stabilizing effect. I guess my point is that none of these individually seem extreme enough to cause a problem. Maybe in aggregate there could be a storm.
- obblekk 11y ago
  I think the bigger issue is that China faces labor competition on the lower end of the unskilled market from South East Asia and India and is trying to enter the lower end of the skilled labor market but finding out that the Americans, Europeans, and Israelis are fairly competitive. I'm generalizing and neither list of countries is exhaustive.
  - jcoffland 11y ago
    China is miles ahead of South East Asia and much of India. Chinese tourists go to places like Vietnam and are seen as wealthy and sophisticated by the locals. From the Western perspective it may seem like China, SEA and India are on a level playing field but that is far from the truth.
    - seanmcdirmid 11y ago
      Bangkok is a much more cosmopolitan city than Beijing or even Shanghai. I get the feeling that Thailand is a bit richer than China per capita. That's about it though.
      - dh997 11y ago
        Beijing takes the cake for both craziest bus drivers and bicyclists, beating Hanoi and Davis, CA.
        seanmcdirmid 11y ago
        This is so true. No matter what city I go to (Manila? Bangkok? Delhi? Kunming? Changsha?), it never feels as bad as home.
yueq 11y ago
The number is not that bad. Comparing to US Bank Nonperforming loans ratio, Quarter Total Loans Nonperforming Perc 2013 Q1 7,658,238,093,000 261,202,393,000 3.41 2013 Q2 7,732,341,313,000 239,430,499,000 3.10 2013 Q3 7,802,034,024,000 221,209,596,000 2.84 2013 Q4 7,893,109,125,000 207,256,779,000 2.63 2014 Q1 7,930,820,793,000 195,236,127,000 2.46 2014 Q2 8,109,181,723,000 181,567,784,000 2.24 2014 Q3 8,160,095,554,000 171,922,840,000 2.11 2014 Q4 8,309,545,800,000 162,654,076,000 1.96 2015 Q1 8,362,016,000,000 152,966,093,000 1.83 2015 Q2 8,546,950,627,000 144,686,145,000 1.69 2015 Q3 8,642,299,288,000 139,164,401,000 1.61 2015 Q4 8,839,565,653,000 137,835,965,000 1.56 Source: http://www.bankregdata.com/allAQmet.asp?met=NPL http://www.bankregdata.com/allAQmet.asp?met=NPL

tim333 11y ago

China's situation is a bit different to the US's in that given it's socialist leanings it will probably just keep lending and bailing out.

themagician 11y ago
How is that different from the US situation? Isn't that exactly the US situation?
- tyre 11y ago
  Yes, basically. Home owners were given mortgages they couldn't afford except under beyond-ideal circumstances. They then would refinance and take out other mortgages, until the whole house of cards came down. The Saudis could maybe handle a situation like this, given their natural resources. As the current price of oil has shown, however, being rich in natural resources has its own issues. The same principles apply across China, Saudi Arabia, and startups: at a certain point, you have to make money.
Outdoorsman 11y ago
Good point... I would have to believe that within China there are many brilliant economists who knew that their "expansion" could not continue forever... Further, I think government officials were informed of the same... We have a vague idea of their "reserves"...that vagueness is a bit troubling...

greggarious 11y ago

Assuming this headline is correct, what effects would that have on the global economy?

ktRolster 11y ago
Probably small. China's financial system isn't entwined with the US/European system as much (the Fed buys bonds from the ECB, and vice versa). Commodities will be hit the hardest, because China will stop importing them. Alan S Blinder estimated that a very severe recession in China would affect the US GDP by .2% So that kind of gives you an idea.
- nickgrosvenor 11y ago
  Famous last words, we live in a global economy now.
- jcoffland 11y ago
  China holds more US treasury bonds than any other country. How are we not intertwined?
  - roel_v 11y ago
    You've been saying that across this thread, but let's say that Chinese banks start to go bankrupt because of nonperforming loans. The Chinese central bank holds large amounts of US treasury bonds. What would be the effect of the bankruptcies? A sell-off to bail out Chinese banks? How would that work; they'd get dollars for their tbonds; then what? Would it depress tbond yields? They can't go much further before you have to pay to hold them... I don't understand the reasoning behind the 'but the Chinese hold lots of US debt!' argument. This isn't like a mortgage where the lender can call in the loan at any point, and if you don't pay they'll repossess your house; or a loan from a loan shark who'll break your kneecaps if you don't pay up. What would happen with or because of these debts?
    - jcoffland 11y ago

narrator 11y ago

Ahhh the old' China crisis again! The dog that didn't bark. The Charlie Brown football that never got kicked. The constant and unending crisis that is on its way any day now. As I have explained over the years in many previous comments, China's banking system is partially privatized central planning, the government prints it's own money. Thus, when there is a credit crisis the government just recapitalizes the banks with freshly printed Yuan and sells off the bad loans at a discount. Bankers who behaved badly get executed or disappeared and the whole thing starts over. Don't believe me? Let's take a trip down memory lane on HN: China: Crisis Gauge Rises to Record High 2 points Cless 2 years ago 0 comments (http://www.bloomberg.com/news/2014-02-26/crisis-gauge-rises-to-record-high-as-swaps-avoided.html http://www.bloomberg.com/news/2014-02-26/crisis-gauge-rises-...) China Interbank Rates at Record High (think Lehman Bros.) 1 points teawithcarl 3 years ago 0 comments (http://m.theepochtimes.com/n3/118747-china-banking-crisis-interbank-rates-at-record/ http://m.theepochtimes.com/n3/118747-china-banking-crisis-in...) China's Brewing Crisis Is a Thousand Times Greece's 8 points ytNumbers 6 months ago 4 comments (http://www.forbes.com/sites/panosmourdoukoutas/2015/08/25/chinas-brewing-crisis-is-a-thousand-times-greeces/ http://www.forbes.com/sites/panosmourdoukoutas/2015/08/25/ch...) Skyscraper index points to elevated risk of financial crisis in China, India 2 points cs702 4 years ago 0 comments (http://www.scribd.com/doc/78470886/Index-Bubble-Building-100112-2-1-14300620 http://www.scribd.com/doc/78470886/Index-Bubble-Building-100...) China fears bond crisis as it slams quantitative easing 1 points chaostheory 7 years ago 0 comments (http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5286832/China-fears-bond-crisis-as-it-slams-quantitative-easing.html http://www.telegraph.co.uk/finance/newsbysector/banksandfina...) China hit hardest by US Downgrade 2 points ca136 5 years ago 0 comments (http://gulfnews.com/opinions/editorials/us-crisis-hits-china-hardest-1.848525 http://gulfnews.com/opinions/editorials/us-crisis-hits-china...) China’s Coming Economic Crisis? 3 points kercker 2 years ago 0 comments (http://www.nytimes.com/roomfordebate/2014/04/08/chinas-coming-economic-crisis?hp&rref=opinion http://www.nytimes.com/roomfordebate/2014/04/08/chinas-comin...) Why China Will Have an Economic Crisis 1 points eande 4 years ago 0 comments (http://business.time.com/2012/02/27/why-china-will-have-an-economic-crisis/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+time%2Fbusiness+%28TIME%3A+Top+Business+Stories%29 http://business.time.com/2012/02/27/why-china-will-have-an-e...) Confidence of China VCs drops to new low 2 points ilamont 7 years ago 0 comments (http://www.thestandard.com/news/2008/10/29/global-economic-crisis-drives-china-vc-confidence-new-low http://www.thestandard.com/news/2008/10/29/global-economic-c...)

gesman 11y ago

I think mr. Madoff need to be let out of jail to educate Chinese government.

melted 11y ago

FWIW, George Friedman (of STRATFOR) predicted this, except he believed the implosion of China would be on a truly catastrophic scale. So they could still be at the edge of a much deeper hole. See: The Next 100 Years: A Forecast for the 21st Century https://www.amazon.com/dp/0767923057 https://www.amazon.com/dp/0767923057

jqm 11y ago
He also predicted Mexico and Poland would become world powers soon. Although there are some interesting insights, I take his predictions with a whole shaker of salt.
- melted 11y ago
  Not really "soon" — more like towards the middle of the century for Poland, and end of the century for Mexico. I'm curious about his predictions on Russia and Turkey in particular.

sharetea 11y ago

This article is good, but it underscores how fast and catastrophic China's collapse is. - China's total debt risen to 346% of GDP in 2015. http://seekingalpha.com/article/3852886-chinese-debt-problem-stay http://seekingalpha.com/article/3852886-chinese-debt-problem... - China exports fall 11.2% in January, imports down 18.8% http://www.cnbc.com/2016/02/14/china-releases-trade-data-for-january-yuan-denominated-and-us-dollar-imports-and-exports.html http://www.cnbc.com/2016/02/14/china-releases-trade-data-for... - China’s $6.7 trillion bond market is flashing the same danger signs that triggered a tumble in stocks http://www.thestar.com.my/business/business-news/2015/10/10/if-you-think-chinas-equity-bubble-is-scary-check-out-bonds/?style=biz http://www.thestar.com.my/business/business-news/2015/10/10/... - China Capital Outflows Rise to Estimated $1 Trillion in 2015 http://www.bloomberg.com/news/articles/2016-01-25/china-capital-outflows-climb-to-estimated-1-trillion-in-2015 http://www.bloomberg.com/news/articles/2016-01-25/china-capi... - China's Net Capital Outflows Probably Hit $113 Billion In January http://www.actionforex.com/analysis/daily-forex-fundamentals/china's-net-capital-outflows-probably-hit-$113-billion-in-january:-iif-20160210257745/ http://www.actionforex.com/analysis/daily-forex-fundamentals... - "Chinese banks will lose approximately $3.5 trillion of equity if China's banking system loses 10 percent of assets" (all of its reserve would be gone) http://www.cnbc.com/2016/02/10/kyle-bass-china-banks-may-lose-5-times-us-banks-subprime-losses-in-credit-crisis.html http://www.cnbc.com/2016/02/10/kyle-bass-china-banks-may-los...

yueq 11y ago

The root cause of 08 financial crisis is not simply 'subprime loans' that can't be repaid. It's because of trillions of derivatives that those banks hold, and lack of liquidity when banks are making wrong bet. China doesn't have many complex financial engineerings as US did in 07/08.

slantedview 11y ago
It was broader than subprime and derivatives even. It was a general real estate (housing) bubble. Home prices became massively inflated and the various investments tied to housing came crashing down. A similar result can be expected in China when the music eventually stops.
- yueq 11y ago
  When price go up it doesn't mean a it's a bubble. Getting loans is way harder/regulated in China than 06/07 US. Currently 25+% down payment or 70% for 2nd home is required. -- Comparing in 2007 banks only asks for 3% down.
  - viblo 11y ago
    China have aggressively lowered the requirements the last years. At the moment it should be 20% for first and 30% for 2nd home. Still some way to go for US levels ofc. www.mingtiandi.com/real-estate/china-real-estate-research-policy/china-lowered-downpayments-but-will-it-help-sell-homes-in-the-hinterland/
  - slantedview 11y ago
    Prices going up for no good reason (increase in demand or decrease in supply) means there is a bubble. This is what happened in the US. Bubbles are the cause of speculation, such as building cities that sit empty.
- shostack 11y ago
  Any thoughts on what that will mean for the US real estate market given continued Chinese investment here? My current guess is we'll see more money pour in as people attempt to shelter their Chinese funds.

jernigan 11y ago

Fear of Women’s Chest lead to the Discovery of Stethoscope: Rene Laennec.. http://goo.gl/P7xc2s http://goo.gl/P7xc2s

jcoffland 11y ago

The American media seems to jump at any opportunity to dismiss China as an economic threat. It makes us feel more secure but leads to a public informed only about one side of China's story. Namely the part our ego can handle. China has regularly surpassed the US in number of cars sold since 2009. China also holds more US debt than any other country. Another way to put that is the US government owes China over 1 trillion USD. This, I believe, is the real reason the American media trips over themselves to write stories that sooth away the nagging fear that China is, or even already has surpassed us economically. Edit: more interesting facts. - China's percent GDP growth is more than twice that of the US. (7.4% vs 2.4% in 2015) - China's government has $3.9T in cash reserves vs the US' $434B. - China has twice as many children enrolled in primary and secondary school and 50% more undergrads than the US. We can only say but, but, but for so long.

fasteddie 11y ago
US treasuries are at historically low rates -- if China dumped 'em all it probably wouldn't move the needle that much. And the reason they hold so many is not as some control play against the US -- its because it was the best way to devalue their currency enough to support exports.
- jcoffland 11y ago
  How it looks depends a lot on your bias. The fact remains that China can soak up $1T of US liquidity.
  - Golf_Hotel_Mike 11y ago
    Yes, they 'can' soak up $1T of liquidity the way I 'can' lock myself into my house and set it on fire. Common sense suggests they will never actually do so.
  - abduhl 11y ago
    I'm not very familiar with this issue but could you please explain how China can soak up $1T of LIQUIDITY when most of this $1T is, as I understand it, in bonds. Wouldn't this debt being in bonds mean that 1) there is a schedule of payments that have already been accounted for in the budget and 2) that they cannot "call in" the debt? Certainly China could refuse to buy additional bonds that we put out which may impact liquidity but there are always buyers for US debt - Japan was the largest foreign holder of US debt just last year.

einar2812 11y ago

Is it right that China owns a lot of its own debt AND a lot of US debt as well? And also heard that China supposedly has the largest gold reserves in the world, dwarfing any other country in comparison. Could that count for something?

foxhedgehog 11y ago
They would probably have to spend at least a good chunk their dollar reserves in order to manage a truly catastrophic currency decline.

hgh 11y ago

Michael Pettis is one my favourite China commentators, with a big focus on the shifts necessary in the balance sheet and composition of growth, and whether that can be done smoothly or necessarily through some catastrophe. Not to mention a broader view of the political economy of the change. Here's a recent post he did that's worth a read (at least through the nine point summary): http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-reforms-help-china/ http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-...

welanes 11y ago
Pettis is the man. Essential reading for understanding China's economy.

JumpCrisscross 11y ago

There's a conjecture, in economics, that out of a fixed exchange rates, free capital flows and a sovereign monetary policy, a country can only pick two. This is known as the Impossible Trinity [1]. The United States plays strategy b, relinquishing a fixed exchange rate. Greece plays a, trading away its monetary-policy sovereignty within the eurozone. China is trying to move from c (ex free capital flows) to b (ex fixed exchange rates). In the process, it's caught in the Impossible Trinity. Either coördinated decisiveness or some combination of a currency and/or capital-outflow will force them into a stable configuration. [1] https://en.m.wikipedia.org/wiki/Impossible_trinity https://en.m.wikipedia.org/wiki/Impossible_trinity

zcbenz 11y ago

If you keep saying China has economic crisis, finally you are gonna be right some day.

foxhedgehog 11y ago
That, or you were finally right last summer.
seanmcdirmid 11y ago
There should have been a crisis a few years ago but the government has chosen to keep the bubbles from popping. $1 million for a 90 sqm apartment in Beijing that rents form $1500/month is pretty frothy. But the CPC repealed the law of gravity, so it doesn't apply to the Chinese economy. Maybe it's really different this time. But probably not. The only question now: will they inflate the currency turning all those savers into losers, or reign in credit and bad debts, choking the economy and growth. They won't be able to just hide behind growth now.

foxhedgehog 11y ago

One factor not discussed in this article is the demographic headwinds that China is heading into. Their one child policy is only now resulting in greatly distorted working age ratios, which means that their non-working elderly population is increasing faster than the population of workers to support them. With a safety net in place that relies heavily on existing familial structures rather than government programs, there are reasons to be concerned about declining aggregate demand over the next several years, precisely as China is trying hardest to transition from export-led growth to a larger, domestically-focused economy.

jorgecurio 11y ago

Everytime a piece about china is posted the comments are quickly the same in tone, "oh but China already surpassed US" uh no it fucking didn't not even close. Especially when the Chinese minister admitted China's GDP is complete fiction. Nobody in China even knows the score because it's super tough with all the corruption to get anything done with accuracy. It's like there's no room for a China that is fallible. China is perfect the all knowing all seeing for these crowd. China is the future they claim. Not with that ugly ass communist nanny state system suppressing free speech and censoring media you don't.

dharma1 11y ago

At some point, some percentage of those loans will default. Financially China can handle it, though when those loans default, the chain of events will also have some global consequences. The question is, when the loans do default, and with it some effects to the real economy/people, what happens to the public perception of the government in China? There is a good chance of social unrest

maolt 11y ago

Having lived in Beijing for 3 years, I try to pay more attention to the country's "hidden" or at least somewhat non obvious debts. The Chinese soil is dying or dead. The population as a whole and the younger generations in particular are facing future health issues of cataclysmic proportions. The pace at which the country moves is sure to leave dozen of millions of people in the dust. Those already left in the dust endure, because their living conditions are better than those of their parents. Yet their kids' might not be, and they will choose to endure or not (and vent in a way they think appropriate). That, added to the dearth of females, and the Confucianist view of a man's place in society are already proving explosive. China has a lot of potential, but it also faces challenges of epic proportions. To me, the economic problems are more a symptom of the problem rather than the problem to worry about.