That’s one huge bad loan problem.
23% of the $1.1 trillion that Chinese banks have lent to infrastructure projects backed by local governments are likely to go bad, an unnamed source with access to government data has told Bloomberg.
The works out to about $260 billion in potential bad loans or about five times the $50 billion that China’s five biggest banks plan to raise this year in new capital.
About half of the projects can’t generate sufficient revenue to cover their debt service. The interest on these loans will have to be paid by other sources including the local governments that guaranteed the loans.
The problem isn’t likely to show up all at once. Many of the loans to the investment vehicles set up by local governments (since China’s local governments aren’t allowed to borrow themselves) are long-term debt. Borrowers will probably manage to scrape up interest payments for the next year or two in the hope that something will happen to bail them out before running out of cash. That means that loan problems will start to show up in large numbers in two or three years.
But show up they will. This same insider said that government data show that only 27% of the loans to local government-affiliated investment vehicles will generate enough cash to repay their loans.
The central government is ultimately on the hook for this bad debt—well at least as much on the hook as Beijing can be given its history of simply burying bad debt in special purpose vehicles.
But still Beijing has recently moved to limit the problem as much as it can at this late date. In June Beijing ordered local governments to concentrate on completing projects already underway rather than starting new work. Financing vehicles that rely only on the income of local governments to repay debt should stop spending. And local governments have been barred from guaranteeing the loans of local investment vehicles.
Not all of China’s big banks are equally exposed to these loans. China Citic Bank (CHBJF.PK) faces the biggest exposure, wrote Sanford C. Bernstein analyst Michael Werner in a recent report. China Merchants Bank (CIHHF.PK) faces the least exposure.
One more.
http://articles.moneycentral.msn.com/Investing/top-stocks/blog.aspx?post=1787375
Just when you think you’ve had enough China, here is the latest.
http://www.cnbc.com/id/38482538
skeptic,
It is hard to say exactly what will happen. I suspect we will not see the kind of collapse the U.S. experienced, since much of China is still poor. You have plenty of the “nowhere to go but up” factor. Also, China has much tighter controls on it’s economy than the U.S. does, so they also have more options for burying the problems. If I had to speculate, I would expect to see pockets of trouble in China, rather than a nationwide financial collapse.
What’s the result going to be? Contrbute to inflation? Slow China’s GDP? Both? Something else? Looking at it from invesor angle.
cmadad,
I would expect weak companies in China to suffer. If you are investing in China, you should lean towards the large caps and the smaller companies showing value and growth but little or no debt.
ain’t that the truth. Except I don’t know anyone who thought the soviets could do no wrong. Frankly, i don’t remember them doing much right.
We get scared of the unknown, this to me correlates with the great former USSR, who in our eyes could do no wrong and were proven to be an emperor without clothing. Yes, there are vast differences, but lets keep things in perspective people, for all the infrastructure spending they are doing it is still lacking severely, majority of people live without the basics, and survive on dollars per day.
Should we extrapolate from Bejjing’s edict to the local governments that there will be less demand for commodities, infrastructure, etc. from suppliers outside the country? What impact will this have on the stock of developing countries and emerging markets that supply China? Any thoughts? Ed?
maldini,
Actually, if the Chinese wanted to, they could just take a bunch of dollars out of their stash, write “yuan” on them, and hand them out! Think of all the printing costs it would save them! 🙂
This is not a problem for China at all. They can just print the money to cover the debt.
off topic… are ETFs causing late day volatility?
http://www.reuters.com/article/idUSTRE66R5HY20100728
The policy makers in Bejing are brilliant. They’re getting western investors unwittingly to put up the money to stimulate their economy and build out their infrastructure. They demand the banks make bad loans, hide the resulting toxic waste in off balance sheet sivs ala Citi, send the banks into the market to raise capital to shore themselves up, and the banks cash in on the west’s desire to be part of the demographic growth, part of the next greatest thing since Japan circa 1988, etc. Sure beats the hell out of taxing the populace or issuing debt to fund your stimulous. Mao may yet have the last laugh…
Interesting:
“Exxon Mobil Corp. said Thursday its second-quarter net income climbed by $3.6 billion amid higher crude prices, rising production and a slight drop in capital spending, while conditions in the refining business improved.”
Response: SELL!!!
Does anyone else feel like they’re in the Twilight Zone here? Down is up, left is right and while we know 2+2 equals 4, it just might equal 5 so we’re going to take a “wait and see” approach…
Off topic.
Jim:
I am having trouble to subscribe JAM letters. I have emailed infomation@jubakam.com. Hope it’s taken care soon.
Also what are you going to do with this blog and the 4 lists on it, Jubak’s Picks, Jubak 50, Jubak Income and Jubak Watch list?
Will Jubak fund invest in the same stocks as Jubak picks?
Thanks and congratulations on all you ventures.
Prime Minister Alfred E. Neuman of the PRC had this comment today: “What, me worry?”
Seriously though, this is just further indication that Chinese companies without debt should make out well. This isn’t a case like Greece bringing down the euro with Greek debt.
This example is “China”. The true risk is the inability of investors to recognize the trigger that will set off the implosion. Unfortunately the whole world is holding on to the tip of the dragon’s tail hoping for a swing to prosperity with no ability to see the head of the beast. Your reporting that “Beijing ordered local governments” is a bit of a joke. Local government behavior is as uncontrolled as the movement of the dragon’s head.
Off topic. Jim or anybody – Long ago MON was a watch list stock. They are in a horrible decline owing to the collapse in the price of their “Round up” product in global markets. Are the fundamentals behind their business model faulty or is this a long term opportunity for patient investors?
中華壓力測試的人？
Off Topic… any thoughts on BG? They are down about 13% based on lower guidance for the year. It’s one of Jim’s 50 and I’ve been watching, but not closely enough to know if this is a buying opportunity.
thats a lot of bad loans…