Nouriel Roubini said some time ago that 30% of Chinese bank loans will become non-performing, which will shake the foundation of the banking system in China. Well, it seems that he knew what he was saying, unfortunately. According to a report by PriceWaterhouseCoopers cited by ZeroHedge, matured and overdue loans reached 489 billion yuan ($77.6 billion) at the end of the second quarter of this year.
At the end of 2011, these loans, likely to become overdue, was only 112.9 billion yuan ($17.8 billion), which means that in just six months, the amount of overdue loans increased by 333%. These loans can not yet be declared bad because the definition of bad loans takes into account credit and interest overdue for more than 90 days and/or where judicial proceedings have been initiated against the operation or the debtor.
Even if they can not be considered non-performing loans (NPL), the enormous growth of these loans is dangerous because it is the first and biggest sign that China’s financial system is on the verge of a major earthquake.
Growth based on excessive credit
Roubini’s opinion was shared by the rating agency Fitch, which warned that it might downgrade credit rating of China because the bad loans. This statements do not appear to be unfounded, since banks do not want or can not lend money for construction projects that will later fail. An example an interesting comparison: for four years, China has built about one billion square meters of housing buildings per year. The area required for real owners – people moving from the countryside to the city, for example – is only 700 million square meters per year.
Chinese Economy Lost $3.79 Trillion in Illicit Financial Outflows Since 2000, Reveals New GFI Report
The Chinese economy hemorrhaged US$3.79 trillion in illicit financial outflows from 2000 through 2011, according to a new report [ HTML | PDF ] released today by Global Financial Integrity (GFI), a Washington, DC-based research and advocacy organization. Amidst increased domestic concern over inequality and corruption, GFI’s study raises serious questions about the stability of the Chinese economy merely two weeks before the once-in-a-decade leadership transition.
“I’ve studied the proceeds of crime, corruption, and tax evasion for decades, and the magnitude of illicit money flowing out of China is astonishing,” said GFI Director Raymond Baker. “There’s no other developing or emerging economy that even comes close to suffering as much in illicit financial outflows.”
A new report by Global Financial Integrity shows that over the last ten years, China has lost $3.79trillion in money smuggling.
This includes money lost in corruption, crime, or tax evasion – and it creates a constant outflow from the country that continues to grow.
In 2000, for example, $204.7 billion in dirty money flowed out of the country. Over a decade later, in 2011, this had more than doubled to $472 billion – 8.3 percent of the nation’s GDP.
Often it occurs through trade mispricing. Traders will record inflated prices, shaving funds off the top. According to the report, this action was highest in the trade of nuclear reactors, boilers, machinery, and electrical equipment.
“The magnitude of illicit money flowing out of China is astonishing,” said GFI director Raymond Baker. “There is no other developing or emerging country that comes even close to suffering as much in illicit financial flows.”
“The system here isn’t stable and you don’t know what’s going to happen next…”
As China’s Communist Party prepares a momentous leadership change in early November, it is losing skilled professionals like Ms. Chen in record numbers. In 2010, the last year for which complete statistics are available, 508,000 Chinese left for the 34 developed countries that make up the Organization for Economic Cooperation and Development. That is a 45 percent increase over 2000.
Individual countries report the trend continuing. In 2011, the United States received 87,000 permanent residents from China, up from 70,000 the year before. Chinese immigrants are driving real estate booms in places as varied as Midtown Manhattan, where some enterprising agents are learning Mandarin, to the Mediterranean island of Cyprus, which offers a route to a European Union passport.
“People who are middle class in China don’t feel secure for their future and especially for their children’s future,” said Cao Cong, an associate professor at the University of Nottingham who has studied Chinese migration. “They don’t think the political situation is stable.”
Most migrants seem to see a foreign passport as insurance against the worst-case scenario rather than as a complete abandonment of China.
A manager based in Shanghai at an engineering company, who asked not to be named, said he invested earlier this year in a New York City real estate project in hopes of eventually securing a green card. A sharp-tongued blogger on current events as well, he said he has been visited by local public security officials, hastening his desire for a United States passport.
“A green card is a feeling of safety,” the manager said. “The system here isn’t stable and you don’t know what’s going to happen next. I want to see how things turn out here over the next few years.”
China’s $50,000-a-year limit on moving capital hasn’t prevented about $225 billion from leaving China, equivalent to about 3% of the nation’s economic output last year. The WSJ’s Alex Frangos explains China’s money trail.
On Friday, Nike shares declined 1.1%, largely on China concerns. The world’s largest sporting goods company reported that Chinese orders were down 6% when analysts had expected them to rise 1.2%.
The only real surprise is that almost no one saw this coming. Rahul Sharma, founder of Neev Capital, maintains investors overreacted to Nike’s China problems, saying they should have been paying attention. It’s no secret Nike has been carrying excess inventory in China, and this had led to discounting that in turn hurt sales of new products.
Company after company is reporting softening Chinese consumer demand. Most notably, Burberry’s Chief Financial Officer Stacey Cartwright blamed China as her company released discouraging guidance earlier this month. Its stock dived 21%, the worst one-day loss since the retailer went public in 2002.
Investors still believe consumption will carry the Chinese economy past its current difficulties. And on the surface, China’s shoppers appear resilient. The National Bureau of Statistics reported that retail sales increased 13.2% in August year-on-year. Moreover, the People’s Bank of China is apparently expecting a stellar National Day. Days ago, the central bank completed the biggest weekly net injection of cash in China’s history—365 billion yuan—to meet expected demand during the week-long holiday.
Yet even official statistics are starting to reveal the slowdown in consumption. For one thing, the current retail-sales figures represent a deterioration from the second half of last year, when growth ranged from a low of 17.0% in August to a high of 18.1% in December. Moreover, current growth rates are also below those in the beginning of this year: the aggregated January-February period clocked in at a still-healthy 14.7%, and March posted a 15.2% gain.