Tag Archives: Asia Crisis

Here Comes Swan’s Black Swans – Chinese Bad Debt “Bigger Than Stated”

8 Jul

Remember our Wayne’s tireless refrain on the economy?

That investment (mostly from China) in our resources sector will ensure a budget back in surplus (for one year), and “lasting prosperity” via an endless “boom”?

Remember how he remains ignorant of all the many warnings about China?

(And, about our second largest trading partner, Japan?)

Including this one, just before the May budget:

“The market is telling you that something is not quite right,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong today. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.

Faber joins hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff in warning of a crash in China.

China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade.

Remember the devastating critique of the May budget by Macquarie Research? The one that said Wayne’s (ie, Treasury’s) forecasts for business investment – the key assumption underpinning all the budget projections – are “truly extraordinary”?

Upbeat growth forecasts from the Treasury and the Reserve Bank of Australia (RBA) are based on very optimistic forecasts for private sector business investment.

The RBA and Treasury forecasts for business investment over the next couple of years are truly extraordinary.

In our opinion, achieving such stratospheric growth would be extremely difficult.

By putting all their eggs in the mining investment basket, policymakers appear to have no Plan B for what will support the economy if investment disappoints. And this note provides three clear reasons why one should be cautious about counting those mining investment chickens before they are hatched.

Well, on July 4 the international ratings agency Moody’s – the same one that has downgraded our banks and effectively declared them “Too Big To Fail – dropped another bomb on Wayne’s parade.

It says that 10% or more of Chinese GDP is bad debt, and claims that the “China debt problem (is) bigger than stated”.

From Moody’s Investors Service, via ZeroHedge (emphasis added):

Moody’s Investors Service says that the potential scale of the problem loans at Chinese banks may be closer to its stress case than its base case, according to an assessment that the rating agency conducted following the release of new data by China’s National Audit Office (NAO).

Since these loans to local governments are not covered by the NAO report, this means they are not considered by the audit agency as real claims on local governments. This indicates that these loans are most likely poorly documented and may pose the greatest risk of delinquency,” the analyst adds.

Moody’s report estimates that the Chinese banking system’s economic non-performing loans could reach between 8% and 12% of total loans, compared to 5% to 8% in the rating agency’s base case, and 10% to 18% in its stress case.

But it’s not just Moody’s now warning about China’s banking system.

From MarketWatch (emphasis added):

China’s debt woes point to bank bailout

China’s banking system will require an eventual bailout by the central government, according to some analysts, who said figures released last week on the size of local-government borrowings point to the need for a rescue.

Credit Suisse economist Dong Tao said the numbers backed up concerns he’s been voicing for the past two years on China’s toxic loan problem.

“Ultimately, we believe that the central government will need to separate the local government’s bank debt from banks’ balance sheets and recapitalize the banks,” Tao said in a note following the release of data on China’s local-debt obligations by the National Audit Office.

Reuters reported last month that Beijing is considering a bailout that could see the central government accept to 2 trillion to 3 trillion yuan of local governments’ outstanding debt in an effort to ensure against a mass default, which could bring down the economy. See report on China’s initial bailout plans.

Stress is building within the system, Tao said, as local governments face a growing pile of debts coming due at a time of declining land sales, normally a key revenue stream for the provincial authorities.

Meanwhile, local governments are also having trouble finding new sources of lending as state-controlled banks grow increasingly wary of their deteriorating ability to service existing debt.

Standard Chartered said last week there were early signs of major financial distress building at the local government level.

Anecdotes of local-government investment vehicles in Shanghai and in Yunnan province struggling to meet loan payments “signal the beginning of the wave of difficulties,” Standard Chartered’s China economist Stephen Green said in a note Thursday.

And Bloomberg reports that both Fitch Ratings and Standard & Poors have also flagged serious concerns:

Fitch Ratings lowered its outlook on China’s AA- long-term, local-currency rating to negative from stable on April 12 because of the risk the government would have to bail out banks. As much as 30 percent of loans to local government entities may go bad, accounting for the biggest source of banks’ non- performing assets, Standard & Poor’s said that month.

Now, are you one of those who doubts that China’s “boom” is/was driven by massive borrowing by local (regional) Chinese banks to finance over-investment in “infrastructure” – the mother of all real estate bubbles world wide?

Then take a look at these pictures from Time magazine, showing just how massive speculative over-investment in property construction has left China with literal ‘ghost cities’:

Click to visit the complete Time photo series

If like many readers you have skimmed over this article and not bothered to click on … and carefully read … all of the links embedded in this article, then you are doing yourself and your loved ones a disservice.

Because you are about to leave this site … ignorant.

With only part of the story.

Do not be a Goose.

Like Swan.

Educate yourself.

Lots of labour has gone into collating all these news articles from around the world.

Over many, many months.

Do yourself a favour, and become better educated about reality than the buffoon who lives in Wayne’s World.

So that you too can see with crystal clarity the gaggle of Black Swans that are soon to blot out our Aussie sun.

Then you too can help to warn others.

Because rest assured – just as with the GFC – you will get no forewarnings from our “expert” economists when the SHTF.

Or from our “authorities”.

Or from their sycophants in the mainstream “business” media.

Your superannuation depends on your being properly informed.

Because both “sides” of politics are planning to steal itwhen the SHTF

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Is Our Biggest Economic Danger Hiding In Plain Sight?

14 Jun

In recent days we’ve looked at threats to Australia’s economic future from China and the USA.  And, we’ve looked closely at the internal threats from our over-indebted government, massively risky banking sector, and housing market bubble.

Now, a genius short-seller who made $500 million betting against the US housing market in 2007 has pointed out what may be Australia’s biggest external economic threat of all.

From Bloomberg:

Buy a farm house in the middle of nowhere, pick up a gun or two, prepare for hyperinflation and brace for a catastrophic bankruptcy. Thirty minutes with hedge-fund manager J. Kyle Bass has you wanting to do all of the above.

The head of Dallas-based Hayman Advisors LP isn’t thinking about Greece or even Spain but Japan, the world’s third-biggest economy. He says his bet against Japanese government bonds is even “more compelling” than his gamble to sell short U.S. subprime-mortgage debt, which earned him $500 million in 2007.

Shorting Japan has been a losing proposition in recent years. But the earthquake, tsunami and nuclear crisis altered the outlook for a nation whose debt is more than double the size of the economy. Bass says a collapse is inevitable, making Japan’s 10-year bonds — they yield 1.3 percent, among the lowest in the world — a natural for a bear investor.

His argument is this: Japan now spends half of its central- government revenue on servicing debt. This task won’t get any easier as the country’s population ages and shrinks — provided rates stay the same. What’s more, the price tag for the earthquake and its effects will far exceed Japan’s initial $300 billion estimate, pushing the country over the edge. In Bass’s view, the biggest asset bubble ever is hiding in plain sight.

According to the Department of Foreign Affairs and Trade (DFAT), Japan is our second largest export market, and trading partner.  Not far behind China:

DFAT - Australia's Top Export markets and Trading Partners to April 2011

If J. Kyle Bass is right … and remember, he made a cool half a billion from correctly picking the weakest link back in 2007 … then we can chalk up Japan on our Ever-Present Threat board as well.

Possibly at the top of the list.

China Lending Tumbles, Signals Slowing Economy

14 Jun

From Bloomberg:

China’s lending tumbled in May and money supply grew at the slowest pace since 2008, adding to signs that the world’s second-biggest economy is cooling.

“This provides another data point highlighting the growth risk,” said Tao Dong, a Hong Kong-based economist for Credit Suisse Group AG. “I think the economy is heading to a soft landing in the second half of 2011, but the risk of a hard landing seems to be on the rise,” Tao said, adding that small companies are short of credit.

A moderating expansion in the Chinese economy is adding to concerns that global growth is faltering.

How’s that promised single year of budget “surplus” in 2013 looking, Wayne?

Is China Bankrupt?

3 Aug

From MSNBC:

All governments lie about their finances. At worst, as in Greece and the United States, the lies are bold and transparent. Everybody knows the emperor has no clothes, but no one want to say so. At best, as in Canada and China, the lies are more subtle – more like a magician’s misdirection than a viking raider’s ax. Look at these great numbers, the lie goes, but don’t look at those up my sleeve.

There’s a good argument to be made that if you look at all the numbers, instead of just the ones the budget magicians want you to see, China is indeed broke

… China has a history of taking debt off its books and burying it, which should prompt us to poke and prod its numbers.

A must-read article. Poke and prod China’s numbers here.

Don’t Bet The House On China

4 May

An excellent and timely article by Karen Maley in today’s Business Spectator (reproduced here in full):

Kevin Rudd’s resource super profits tax has one massive risk – that commodity prices collapse before he gets to collect one cent of it.

Yesterday, the influential forecaster, Marc Faber joined those warning of problems ahead in China. “The market is telling you that something is not quite right”, he said in an interview on Bloomberg television. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”

On Sunday – as Kevin Rudd and Wayne Swan were announcing their new resources tax – China’s central bank made another attempt to dampen property market speculation. It lifted its reserve requirement ratio by a further half a percentage point, so that most Chinese banks will now have to hold 17 per cent of their deposits on reserve.

But this latest increase in the reserve ratio will likely prove as ineffective as the two previous rises in January and February this year. Many believe the Chinese property bubble will continue to expand for as long as the Chinese government maintains interest rates below the rate of inflation.

And that’s the core of the problem. The Chinese government is reluctant to increase interest rates because it risks exposing the huge fault lines that exist in the economy.

Over the past decade, China has built factories and expanded its manufacturing capacity in the expectation that the United States and Europe would continue to demonstrate a robust appetite for Chinese-produced goods. But western demand for Chinese products slowed in the wake of the financial crisis, leaving the Chinese economy with substantial overcapacity in manufacturing.

The problem was exacerbated during the financial crisis. With Chinese exports plunging, the Chinese government launched a massive economic stimulus program, equivalent to around 14 per cent of the country’s GDP. It also ordered Chinese banks to lend, and instructed Chinese state-owned companies to borrow.

The program had the desired result. The Chinese economy grew at an 11.9 per cent annual clip in the first three months of the year, the fastest pace since 2007. And we benefited too, because this strong Chinese growth pushed up the prices of our commodity exports, such as iron ore and coal.

But there are huge concerns over how the Chinese stimulus money was spent. Provincial governments, under instructions from Beijing to reach specified growth targets, undertook massive construction projects that have resulted in a glut of commercial office space, and huge shopping malls that are near-vacant. And much of the increase in bank lending was funnelled into property market speculation, pushing up housing prices to astronomic levels.

The Chinese government has tinkered with various measures to contain its property bubble – increasing the reserve requirement, lifting the minimum deposit that home buyers must have before they’re allowed to borrow, and urging banks to monitor their risks.

But it is loathe to raise interest rates for fear that it will cause mass defaults among manufacturers and property developers, leading to huge problem loans in the banking system.

Eventually, however, an end-point will be reached. Either the Chinese government will raise interest rates, or the property market bubble will collapse under its own weight. At that point, commodity prices will plummet, slashing the profits of the big mining companies.

And if this happens before 1 July 2012 when the new tax regime for the miners comes into effect, Rudd is unlikely to ever see a cent of his new resource super profits tax.

Betting the house on China is exactly what the numbskulls in the Rudd Labor government, the Treasury, and the RBA are doing.

Please take some time to review some of the many earlier articles in this blog, showing how the likes of Treasury secretary Ken Henry and RBA Governor Glenn Stevens have declared that the GFC is ‘over’, and forecast that (thanks to China) we are all set for a ‘period of unprecedented prosperity’ lasting until 2050.

What is vital to bear in mind always, is that these are the very same incompetents who all completely and utterly failed to foresee the onrushing Global Financial Crisis in 2008… even though its first wave had already broken in the USA and on global share markets during 2007!

China May ‘Crash’ In 9-12 Months

4 May

Noted investor and publisher of the fabled “Gloom, Boom and Doom” report, Dr Marc Faber, warns that the Chinese economy may crash within the next 9 to 12 months.

From Bloomberg:

Investor Marc Faber said China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst.

The Shanghai Composite Index has failed to regain its 2009 high while industrial commodities and shares of Australian resource exporters are acting “heavy,” Faber said. The opening of the World Expo in Shanghai last week is “not a particularly good omen,” he said, citing a property bust and depression that followed the 1873 World Exhibition in Vienna.

“The market is telling you that something is not quite right,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong today. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”

Faber joins hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff in warning of a crash in China.

China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade.

For those who doubt that China is currently experiencing the global mother of all real estate bubbles, take a look at these pictures from Time magazine, showing just how massive speculative over-investment in property construction has left China with literal ‘ghost cities’.

Bubble Proof: Chinese Maids Buying Houses

3 May

Unsure about the conflicting arguments in the ‘expert’ commentariat about whether China is in a massive real estate bubble?  Consider real-world anecdotes like those following, related by former Morgan Stanley chief economist and now independent Hong Kong-based economist Andy Xie, who has predicted that an overwhelming “get rich quick” mentality has doomed the Chinese economy.

From a must-read article in BusinessWeek:

“My maid just asked for leave,” a friend in Beijing told me recently. “She’s rushing home to buy property. I suggested she borrow 70 percent, so she could cap the loss.”

It wasn’t the first time I had heard such a story in China. Some friends in Shanghai have told me similar ones. It seems all the housemaids are rushing into the market at the same time.

There are benefits to housekeeping for fund managers. China’s housemaids may be Asia’s answer to the shoeshine boy whose stock tips prompted Joseph Kennedy to sell his shares before the Wall Street Crash of 1929.

Another friend recently vacationed in the southern island- resort city of Sanya in Hainan province and felt compelled to visit a development sales office. Everyone she knew had bought there already. It’s either buy or be unsocial.

“You should buy two,” the sharp sales girl suggested. “In three years, the price will have doubled. You could sell one and get one free.”

How could anyone resist an offer like that?

The evidence in official-corruption cases no longer involves cash stashed in refrigerators or starlet mistresses in Versace clothing. The evidence is now apartments. One mid-level official in Shanghai was caught with 24 of them.

China is in the throes of a vast property mania. First, let me make it perfectly clear that calling China’s real-estate market a “bubble” isn’t denying China’s development success. As optimism is an essential ingredient in a bubble, economic success is a necessary condition. Nor am I saying that prices will drop tomorrow. A bubble evolves and bursts in its own time.

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