China's banks are worse off than a lot of people seem to think; investors gravely concerned and with
24 replies, posted
[quote]Investors are worried about the health of China’s banks. They’re afraid—with good reason—that the massive, state-directed lending binge that was instrumental in pumping up China’s GDP figures the past two and a half years will end up producing an equally massive pile of bad debt. Barely a week goes by without new word of a troubled project or impending default.
Never fear, say the banks and some analysts. They point to the extraordinarily low loan-to-deposit ratios of Chinese banks, averaging around 65%, as evidence that these banks have plenty of cash to cushion themselves against any future loan losses they might suffer. Everything is under control.
This argument is misleading, and offers a false sense of comfort.
First of all, the loan-to-deposit ratio is a measure of liquidity, not of solvency. A high ratio suggests that a bank may be relying too much on volatile short-term borrowing rather than stable long-term customers to fund its lending. It risks getting caught without enough cash reserves on hand to satisfy its creditors, forcing it to sell other assets at a loss, which could eventually cause the bank to fail. Having plenty of cash reserves on the left (asset) side of a bank’s balance sheet can help prevent such a crisis. But it has nothing to do with a bank’s capacity to absorb losses from bad loans without going bankrupt.
A bank’s solvency in the face of losses depends on the loan-loss provisions it has set aside and the capital it has built up on the right (equity) side of its balance sheet. Chinese banks like to boast that they have an average “loan-loss coverage ratio”—the amount of equity set aside, divided by the amount of nonperforming loans—of 220%, up from 80% at the end of 2008. Optimists argue this shows banks have set aside more than twice the amount of equity they would need to make up for all their bad loans.
But that ratio considers only those loans a bank has formally designated as nonperforming, and banks have hardly recognized any bad loans stemming from their recent bout of lending. China’s banks are required to set aside loan-loss reserves equivalent to 2.5% of their total loan portfolios. Yet based on the lessons of previous rounds of credit expansion, it’s more likely that up to 20% or even 30% of their loan portfolios will turn bad at some point in the wake of the latest expansion.
Indeed, estimates leaked by Chinese bank regulators suggest that 23% of loans to local government-sponsored infrastructure projects are an outright loss, with another 50% at risk of cash default. If Chinese banks made appropriate provision for these losses alone, it would reverse the record earnings they have been reporting and eat into their capital base. Apply these estimates across other risky loan categories, such as real-estate development and business lending diverted to speculation in stocks or property, and their capital is in real danger of being wiped out. The loan-to-deposit ratio doesn’t matter; they can have captive deposits and lots of cash, and still be bankrupt if they threw it all away on bad loans.
In fact, all that excess liquidity Chinese banks have on their balance sheets is really part of the problem. It isn’t there because the banks are cautious lenders, but because China’s external imbalances—the inflow of money from both the current and capital accounts, accumulated as foreign-exchange reserves—keeps driving up the domestic deposit base.
Unless this constant injection of money is sterilized and kept out of circulation, with cash reserves piling up and the loan-to-deposit ratio pushed ever lower, the result is runaway lending. That is precisely what happened when banks were allowed to draw on their reserves to fund the lending boom. The high levels of liquidity in China’s banks aren’t a cushion against bad debt. They are the reason those banks loaned money so recklessly in the first place.
Even as a measure of liquidity, however, the loan-to-deposit ratio can be misleading. To bring lending back under control, China’s central bank has ratcheted up the reserve requirement ratio, the amount of cash banks must keep on deposit at the central bank, to 21.5% for larger banks. An average loan-to-deposit ratio of 65%, as of June, would seem to imply at least a 13.5% cushion of ready liquidity still in the system.
However, many of the “non-loan” assets that banks are holding are actually disguised forms of lending such as bonds held to maturity or structured equity in other financing vehicles. Such pseudo-lending has exploded this year as constraints on overt lending have tightened.
The industry-wide ratio of 65% also disguises a big imbalance between large and small banks, which is central to the interbank lending market. Most of the deposits flowing into China from current and capital account surpluses land in the large banks, while China’s smaller banks drive a disproportionate amount of the lending. The large banks have an average loan-to-deposit ratio of 63%. The ratio for small to medium-size banks is 81%, which means many of them must borrow from their larger, deposit-rich cousins to meet their regulatory reserve requirements.
Recent spikes in the interest rates at which banks are borrowing from and lending to each other—the interbank and repo rates—show just how tenuous this relationship can be, as smaller lenders push themselves to the limit, hoping the big banks can foot the bill. The volatile interbank market suggests that rank-and-file Chinese banks are dancing a lot closer to the flame of a liquidity crisis than broader measures might indicate.
People who look to low loan-to-deposit ratios as proof that all is well with Chinese banks need to think again. The statistic tells you nothing about solvency and precious little about real liquidity. If anything, it’s a symptom of the deep imbalances that lie at the heart of China’s banking system.
[As a side note, it's interesting that the large bank/small bank dynamic in China is the inverse of the relationship that long existed in the U.S. pre-liberalization, where smaller, local banks gathered deposits and lent them to the large "money center" banks that drove commercial lending. The Chinese arrangement, in which large deposit-rich banks lend to smaller banks, would seem to imply that financial risk may be less concentrated, but that visibility and discipline may pose a greater challenge for regulators.][/quote]
[url]http://www.businessinsider.com/wsj-chinese-banks-are-worse-off-than-you-think-2011-7#ixzz1T0u6WWWQ[/url]
[b]TL;DR lots of lending went on to grow their GDP as much as possible (to the point where it's spun out of control and become runaway lending), lots of investing in useless projects that were either never completed or completed but have seen limited use (if any), banks are borrowing loads of money from one another to meet their regulatory reserve requirements which is causing lots of inconsistencies and imbalances, spiking interest rates, quite a few other problems.[/b]
Useless projects like those mega cities with no body living in them.
This is very surprising.
Sounds like America
Sounds like a recipe for disaster.
[editline]24th July 2011[/editline]
I'm not really concerned about some sort of armed conflict breaking out, but what happens if/when China comes to collect from the nations its lent money too?
Edit
[QUOTE=CSOD;31306940]So we have American stupidity, European incompetence and now Chinese negligence. Now we just need Indian carelessness and Russian corruption and we can summon Captain Market Catastrofuck.[/QUOTE]
you mean ronald reagan?
...Well, I guess on the upside, that makes the possibility of China becoming the next superpower if/when the US collapses a bit lower.
[QUOTE=Theater;31306589]This is very surprising.[/QUOTE]
I don't think it's surprising to anyone. There's always something funky with large nations and money.
I wonder what huge superpowers will crop up in the future, ~100 years ago the United Kingdom was the most powerful country in the world, the Italians with Romans before that, it makes me wish I could live for centuries to see the rise and fall of nations.
[QUOTE=Oppenheimer;31307259]I wonder what huge superpowers will crop up in the future, ~100 years ago the United Kingdom was the most powerful country in the world, the Italians with Romans before that, it makes me wish I could live for centuries to see the rise and fall of nations.[/QUOTE]
Even if you could do that, you would probably die from conscription or something.
[QUOTE=lulzbocksV2;31306837]Sounds like a recipe for disaster.
[editline]24th July 2011[/editline]
I'm not really concerned about some sort of armed conflict breaking out, but what happens if/when China comes to collect from the nations its lent money too?[/QUOTE]I think there's a chance China goes the way of the USSR.
[QUOTE=Nikota;31307276]Even if you could do that, you would probably die from conscription or something.[/QUOTE]
He would live in a small glass dome in the Marianas trench with basic cable and an infinite supply of Cheetos. He could monitor the rest of the world from there.
[QUOTE=Oppenheimer;31307259]I wonder what huge superpowers will crop up in the future, ~100 years ago the United Kingdom was the most powerful country in the world, the Italians with Romans before that, it makes me wish I could live for centuries to see the rise and fall of nations.[/QUOTE]
South Sudan
calling it
[QUOTE=Bombardier.;31307702]South Sudan
calling it[/QUOTE]
I'd find that extremely amusing.
[QUOTE=CSOD;31306940]Russian corruption[/QUOTE]Uh that's been there longer than the other four bro.
[editline]24th July 2011[/editline]
Anyway Chinese economic growth isn't going to last forever and when it takes a hit it's going to hit them a lot worse because of all the things they do to make bubbles.
[QUOTE=Nerts;31307290]I think there's a chance China goes the way of the USSR.[/QUOTE]
Looking big and scary to outsiders but actually resorting to eat their own shoes to survive?
Yep, sounds like they're already at this point.
[QUOTE=jimhowl33t;31307928]Looking big and scary to outsiders but actually resorting to eat their own shoes to survive?
Yep, sounds like they're already at this point.[/QUOTE]And collapsing into a ton of different countries when it goes down.
China is going to remain fine for the next century. It's a large country with massive resources, it can produce its own things.
The one to worry about is nations outside of China who import all of that stuff, especially once the Chinese force people outside to pay more for their goods and we can't afford them.
[QUOTE=Nerts;31308130]And collapsing into a ton of different countries when it goes down.[/QUOTE]
Thats silly. China has had it's government toppled by just about everyone, but has remained a distinct country with roughly the same borders for over 2000 years.
It outlived Rome, All the nations claiming to be the successors of Rome and even the nation that replaced the last successor of Rome. (If you see that Tsarist Russia is the successor to the Byzantine Empire)
what a shame, i really like chinese art tbh
[QUOTE=Sobotnik;31308262]
Thats silly. China has had it's government toppled by just about everyone, but has remained a distinct country with roughly the same borders for over 2000 years.
It outlived Rome, All the nations claiming to be the successors of Rome and even the nation that replaced the last successor of Rome. (If you see that Tsarist Russia is the successor to the Byzantine Empire)[/QUOTE]
Agreed on that. Kinda silly to assume that China is going to divide into several countries if it crashes, I think the people got quite a strong feel of connection to each other.
I have to admit I don't know an awful lot about China, but it's a big country with a lot of people in it, I don't think it'd be easy to keep everyone under the one banner so to speak.
We're doing fine selling them our lumber, and anyone who [i]wants[/i] the PRC to collapse are frankly out of their minds.
[url]http://www.usni.org/magazines/proceedings/2011-07/chinese-missiles-and-walmart-factor[/url]
[quote]Looking big and scary to outsiders but actually resorting to eat their own shoes to survive?
Yep, sounds like they're already at this point.[/quote]
The Soviet Union [i]was[/i] a superpower, but the West has often overexaggerated it, painting the Soviets ten feet tall. Ever read "Soviet Military Power"? But the bottom line was that they were not a paper tiger. Speaking to some of my friends' parents who once lived in the USSR, it was never close to "extreme poverty and hunger" by the mid-late 1980s. Shortages were big, but they never went to that level. But really, the USSR fell because we convinced them that they had to keep up with us militarily by overspending on defense and they became bankrupt as a result.
[QUOTE=lulzbocksV2;31306837]Sounds like a recipe for disaster.
[editline]24th July 2011[/editline]
I'm not really concerned about some sort of armed conflict breaking out, but what happens if/when China comes to collect from the nations its lent money too?[/QUOTE]
Oh please, the PRC is not an aggressive red monster crushing through your walls. If we reverse the roles, can we really see the American government sending a carrier battle group or two to force a country to pay its debts on the threat of war?
[QUOTE=Nerts;31308775]I have to admit I don't know an awful lot about China, but it's a big country with a lot of people in it, I don't think it'd be easy to keep everyone under the one banner so to speak.[/QUOTE]
Well, on the issue of resources, they have to import a lot anymore to produce the goods they export (and to take care of their own people... sort of; their government really has little compassion for them... all 1.3+ billion) because what they personally haven't used up over the centuries for various purposes has been nearly completely filched by the numerous nations which have invaded and occupied them or exploited them as a developing nation; Japan especially was very taxing on their deposits when they invaded them in the 1930s.
What remains are varying amounts of coal, ore, crude oil, natural gas, mercury, tin, tungsten, antimony, manganese, molybdenum, vanadium, magnetite, aluminum, lead, zinc, and uranium. They have a severe shortage of coal, however, and most of what they do use they have to import from the United States (which has the world's largest deposits of coal). Oil is another thing they're fast running short oil- so much so that in recent years they've become the world's largest oil consumer in terms of imports. A lot of it comes from Russia and the United States; recently they've been trying to find some way to nudge themselves into Africa. By 2020, they will be suffering from a 250 million metric ton shortage annually. In 2005, the southern half of the nation nearly tanked with production because of a severe oil shortage (one of the worst in China's history).
The only resources on that list which they have an abundance of are their metals and rare materials; everything else they have to import massive quantities because of shortages. Oil and coal are obviously the most important resources they need to worry about, but their lack of copper is proving to be a severe handicap to them and to their production capabilities in the modern age (think about how much stuff we both use that have copper components). Though they do have to be given credit for having the world's largest potential supply of hydroelectric power.
China dividing itself up into differing nations really would not be that far fetched given their history- full of plenty of civil wars and rebellion incidents, not to mention on a related note coups and attempted coups. Technically, China today is divided- between the People's Republic and the Republic (the former is the China we all think of when we hear the name: the Communist production state; the latter's better known as just Taiwan). It would take a serious event to cause something like that to happen, though. As in something with worldwide implications. An economic disaster might if it were serious enough, but, there again, don't hold your breath. Besides China's long history of civil wars and revolutions/rebellions, they've also got a long history of financial crises. It's unlikely that any one thing will break them and push their country over the edge; it will take a great culmination of many things. A financial crisis like no other in their modern history might just be that one other thing that causes a spark- in addition to their government's corruption and gross lack of respect for human rights and freedoms, rampant poverty, environmental dilapidation, and shrinking resource deposits, etc. China needs change, that's for true. And at the very least, there's always hope.
Looks like we have a Chinese economic earthquake incoming!
Ehrebrebrebrebrebrebrebr
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