"Toxic Debt" will cause China CRASH
Posted in the China Forum
Port Moody, Canada
#1 Jan 17, 2013
January 17, 2013,
Is Something Toxic Buried in Chinas Financial System?
By DIDI KIRSTEN TATLOW
Is bad debt growing in Chinas economy as it did in Americas before 2008?
PrintBEIJING Chinas economy, whizzing ahead as the West struggles, seems quite remarkable. Perhaps a little too remarkable? Like many things too good to be true, is it all a little, well, too good to be true?
There will be the yea- and nay-sayers in any debate, and Chinas economy provokes plenty of both. So heres the yea side: the forces of urbanization and industrialization unleashed here in the 1970s after the death of Mao Zedong represent a historically singular phase that still has a way to go.
Heres the nay side: thats true, but we need to look at whats actually happening in Chinas financial system is it safe? The trouble is, that system is mostly hidden from the outside world by a combination of language difficulty and the pitch-dark opacity that envelops much important business here. Whats interesting about the nay argument is that increasingly, its Chinese media and some prominent Chinese economists who are making it.
And of course all of this matters to the world because China is by now deeply part of the global economy, so what happens here affects everyone.
A Hong Kong online magazine that follows the Chinese-language debate closely recently presented a clear argument: among key concerns about Chinas financial system are wealth management products offered by trust companies, part of the shadow banking system that operates outside the official banking sector but is entwined with it.
As Week in China wrote recently:Analysts worry that the trust firms (and their wealth management products) could provide an explosive element to Chinas financial landscape much as toxic CDOs made the American system vulnerable.
Port Moody, Canada
#2 Jan 17, 2013
CDOs, of course, are collateralized debt obligations, those complicated financial tools that spurred unhealthy debt and lending in the United States, causing shocks that spread around the world when the system collapsed in 2007.(This graphic makes them as simple as possible.)
For some time, Chinese-language media have been looking at the scene, with outlets such as the 21st Century Business Herald and the National Business Daily leading the way.
Spurring concern was a recent remark by Xiao Gang, the chairman of the Bank of China, that the way trust companies were run was, potentially,fundamentally a Ponzi scheme.(The report is in English.)
Wang Zhao/Agence France-Presse Getty Images
Xiao Gang, head of the Bank of China, at a press conference during the 18th National Congress of the Communist Party of China in Beijing in November.It is difficult to measure the amount and value of wealth management products in circulation in China, wrote Mr. Xiao.(Mr. Xiao has been a proponent of Chinese banks vigorously investing overseas.)
KPMG reports that trust companies will soon overtake insurance to become the second-largest sector in the Chinese financial industry. According to a report by CN Benefit, a Chinese wealth-management consultancy, sales of WMPs soared 43 percent in the first half of 2012 to 12.14 trillion yuan, or $1.9 trillion, he wrote.
Either way, there are now more than 20,000 wealth management products in circulation,a dramatic increase from only a few hundred just five years ago.
Given that the number is so big and hard to manage, Chinas shadow banking sector has become a potential source of systemic financial risk over the next few years, wrote Mr. Xiao.Particularly worrisome is the quality and transparency of WMPs. Many assets underlying the products are dependent on some empty real estate property or long-term infrastructure, and are sometimes even linked to high-risk projects, which may find it impossible to generate sufficient cash flow to meet repayment obligations.
The details are complex. But Week in Chinas conclusion is this:WiC suspects along with swathes of the Chinese press that the trusts and their wealth management products have now intertwined to become the weakest link in the Chinese financial system. In recent weeks its become clearer that these obscure institutions have waded into some wayward financial positions, with certain companies, such as Zhongrong Trust and Shangdong International Trust, particularly involved.
The question now is whether this might lead to a broader crisis, the magazine wrote.
On balance that may still be a way off, it wrote.
As long as the economy expands at close to 8 percent a year,the trusts may be able to grow out of their bad assets. But if one of the major players collapses, the dynamic may be much more explosive. As Charles Ponzi well understood, confidence is everything, it concluded.
Last week, several Chinese-language media reported the big four state banks had stopped selling trust company products to clients in Beijing and were scaling back in Guangzhou.The official clampdown on the trusts might already have begun, wrote Week in China.
Read the story and see what you think: Is China veering towards a U.S.-style financial crisis, or will it take action and avoid one?
Port Moody, Canada
#3 Jan 17, 2013
"trust companies will soon overtake insurance to become the second-largest sector in the Chinese financial industry"
...and they're all loaded with BAD DEBT?
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