Is the Chinese banking system ready to collapse? An interesting article that explains that Chinese financiers are involved in a gigantic Ponzi scheme that is leaving the Chinese financial system very vulnerable.
In a nutshell, shadow bankers borrow money very cheaply from the Chinese controlled banking system, and invest it in construction projects. (Borrowing rates are between 1% and 2%.
They then sell bonds from the projects to investors promising yields up to 8%. Since construction projects are non revenue producing, the units must be sold in order to pay back the loans and investors. With the glut of housing and construction projects, shadow bankers cannot pay back the bond holders their 8%. In order to do this, they again borrow more money from the Chinese controlled banking system for new construction projects and use those funds to pay off the old investors.
Once one of the shadow banker’s projects collapses or goes bankrupt, the entire pyramid of their activities fail as well. The Chinese controlled banks will then have to assume all of the losses associated with the downfall. This is currently why there is a credit crunch in China. The deck of cards is ready to collapse.
See the report here at:
There could be great trouble brewing. No wonder Bernake is backpedaling and keeping the QE on the table.See this interesting report here:
In total, China owns about 8 percent of publicly held U.S. debt. Of all the holders of U.S. debt China is the third-largest, behind only the Social Security Trust Fund’s holdings of nearly $3 trillion and the Federal Reserve’s nearly $2 trillion holdings in Treasury investments, purchased as part of its quantitative easing program to boost the economy.
Meanwhile in all the excitement over WMP and SHIBOR we risk losing sight of the fact that, contrary to what a lot of analysts are suggesting, the problem in China is not that there are specific areas of risky lending that need to be controlled. The real problem is that increased economic activity is inextricably tied to unsustainable increases in debt, and this is a system-wide problem. It will prove impossible both to control increasing financial risk and to keep growth even at current levels. Any attempt to crack down on one form of bad lending will only cause another form of bad lending to surge, and if Beijing really wants to control the worsening financial risk it will have to tolerate growth rates of 3-4% or less.
Tey point is that the economy is addicted to unsustainable increases in debt, and while Beijing can flail away at individual problems areas, it cannot resolve the underlying debt problem without a sharp slowdown in growth.
Most analysts have lowered their forecasts substantially in the past two years, and especially in the past month, but they are still deluding themselves about longer-term growth prospects.
I just don’t see how we can grow at 7-8% without running the risk of a serious debt crisis before the end of the period. As it is we are having a hard enough time understanding what current growth rates really are. Power consumption, for example, simply doesn’t suggest that growth rates have been able to hold up.
Last year’s GDP growth clocked in at 7.9%, although a lot of analysts believe it may have been closer to 5.5%, and if power consumption year to date is already much lower than it was last year, unless there has been a major – and hard to detect – improvement in energy efficiency it is hard for me to imagine why growth this year and next year should even match last year.
Read more at http://globaleconomicanalysis.blogspot.com/2013/07/china-urbanization-growth-fallacy.html#Xsoc0c6ZzJ4KYPo0.99
Economic Doom: China Has Likely Entered A Prolonged Period of Deleveraging, The Economy Is In A Financial Crisis, And Will Likely Continue To Slide In 2014 And Beyond