An ongoing anthology of articles relating to China’s investment bubble.
2014 Update: China’s 2014 Reform To-Do List – the depth and breadth of this list confers how serious the government feels the problems are. One major concern is regulating shadow banking, such as rehypothecation of commodity collateral such as in CCFDs. An important distinction is that while in the U.S. rehypothecation by broker-dealers cannot exceed 140% of the loan amount to a client under SEC rule Rule 15c3-3, China doesn’t have similar regulations yet. A decent flowchart visual of what happens in stage 1 and stage 2.
4/14/14 Chinese Yuan and copper both take a beating; what is most interesting here is Y/Y M2 growth evidencing a slowdown in credit markets.
4/10/14 March trade is down and China has avowed no new stimulus is on the horizon, still skeptics examine China’s reported trade and GDP figures for distortions, believing the reality to be worse than it appears.
4/9/2014 Another default, this time a small manufacturer which Reuters discusses; looking towards the future “Analysts widely expect more defaults on loans, bonds, and shadow bank products this year. Semiconductor, software, and commodities firms are among the most at risk for default, a Reuters analysis of more than 2,600 Chinese companies showed.”
4/7/2014 Very interesting piece by FT suggesting mounting collusion between developers and shadow banks.
4/3/2014 UBS describes “Bazooka Theory,” or why they don’t expect more Chinese stimulus in the near future; in other words expect growth to continue to slow unabated. Also Quartz does a contrarian piece arguing China may not have a real estate bubble; well argued but I’m not buying it, and even without a real estate bubble there is still a broader investment bubble.
4/1/2014 Potential high-yield bond default, this time Xuzhou Zhongsen Tonghao New Board Co., a ‘building materials’ company from Jiangsu who cannot make their 10% coupon payment. Update: apparently they made a deal to get the current interest payment funded, thereby staving off default.
3/27/2014 CCFD importer deal cancellations are surging; directly quoting, “The problem is that once one importer defaults on a contract, suddenly counterparty risk regarding all of China (and certainly those using commodities on Letters of Credit, recall China Commodity Funding Deals) soars, forcing other offshore exporters to collapse liquidity terms when dealing with Chinese buyers, and demand payment on truncated timeframes, resulting in a closed loop of liquidity evaporation from trade networks, which in turn forces local banks to step in and provide liquidity at precisely the time when banks are suddenly far more selective [of] who they issue loans to.”
3/26/2014 China’s liquidity pipeline slams shut as companies scramble for the last drops of liquidity; a restatement of previous articles, albeit thorough.
3/25/2014 Signs of trouble as bank run unfolds, “ordinary depositors swarmed a branch of Jiangsu Sheyang Rural Commercial Bank in Yancheng in economically troubled Jiangsu province on Monday.” As of now, there is no depositor’s insurance.
3/24/2014 Prices on real estate continue to slow in growth, and in some areas prices are falling outright as developers slash prices to liquidate inventory. In Hong Kong groups of homeowners have apparently taken to the street demanding money back after the houses they purchased have since fallen in price.
3/23/2014 HSBC’s flash PMI print shows evidence Chinese growth is, in fact, slowing. Much more importantly, Chinese Vice Minister of Finance Zhu Guangyao publicly indicates China’s policy makers are uneasy about Janet Yellen’s comments regarding QE and tapering, and the necessary global liquidity implications.
3/20 Highsee Group steel maker in Shanxi has defaulted on RMB 3 billion due to the plunge in domestic steel prices, a result of slowing growth. It also appears Hong Kong’s high end real estate market is collapsing and the subsequent scramble for liquidity is underway, best line: “and like every game theoretical outcome, he who defects first, or in this case sells first, sells best.” This furthermore raises the question of Chinese corporate executive’s incentives, surely these real estate developers realize the market is already saturated before they break ground? Probably the best and clearest chain of causal reasoning yet to describe the relationship between RMB, commodities, credit, growth, and how it’s failing (scroll down to bullet points) .
3/19 Morgan Stanley issues some excellent analysis mirroring my own inclinations, even recognizing the reality of a financial Minsky-moment on the horizon. They seem to also agree on a 1-2 year debt implosion timeline. Also today Copper futures slide to a new 5-year low; copper futures seem to routinely (since mid-2011 at least) collapse prices in high volatility sell-offs, it would be interesting to compare these sell-offs to the corresponding news and data releases. Additionally, more evidence of China’s real estate market is slowing.
3/18/2014 The future of China in terms of energy appears bright; although these will take time to develop, the reserves are there. Goldman Sachs’ long and very detailed analysis of Chinese Commodity Funding Deals (CCFDs), i.e. the use of commodities as collateral for loans which has been underpinning Chinese GDP growth.
3/17/2014 Another Chinese corporate default, Baoding Tianwei Baobian Electric (TBE), totaling around $0.5 billion and which the government states it will not bailout; maintaining a hard line zero-bailout policy is encouraging shadow banks to conduct better pricing in of risk-premium, “some 66 percent of new Chinese developer dollar-denominated bonds sold this year are trading below their issue price amid the collapse of a private real estate company and news the housing market is cooling.”
3/15/2014 CCB broadens Yuan trading band, intending to squash carry-trade speculators, but not at zero cost to domestic consumers. South China Morning Post on some of the problems underlying China’s many popular shadow banking trust products.
3/14/2014 “China’s Credit Nightmare Explained in One Chart”
3/11/2014 Copper prices collapsing to 2010 levels and then 2009 levels – copper is pledged and repledged (via multiple layers of rehypothecation) as underlying collateral similar to coal (collateral for sizable trusts maturities), iron (record stockpiles), and likely many other commodities, even as their prices are falling. From BOA, monthly trust products coming due through January 2016, most of these appear collateralized with commodities, for example the “Magic” Chongqing property trust product. China Morning Post covers Slowing credit creation in China.
3/10/2014 Chinese credit growth is slowing; if shadow banking lending is decelerating, this is likely due to liquidity fears concerning existing product maturity schedules. Yet even as Chinese markets start to unwind, real estate prices continue to surge. While I speculate the manufacturing and corporate investment bubble will collapse in 2015-2016 when trust and shadow bank bonds are unable to meet redemptions, this is complicated by the real estate market, which could burst at any time, tightening liquidity and thereby preemptively triggering the corporates. Real estate prices seem to peak and reverse (and thus bubbles burst) much faster according to market dynamics (herd behavior) of investors whereas bonds issued have specific redemption dates at which we can expect them to pass or fail. Current failing credit issuance in China could stress real estate as lower loan creation indicates a peak in home prices (stymieing the willingness of lenders and/or borrowers to speculate further at the given price). When Chinese pollution reforms occur and slow growth, as they inevitably must, commodity prices should collapse.
3/07/2014 China posts second largest trade deficit on record, with analysis; clearly global demand is slowing. Importantly the expected rates of return necessary to support debt repayments are jeopardized, lower demand means lower returns, implying more defaults on repayment.
03/06/2014 A solid analysis of Chinese credit markets, as they begin pricing in risk due to the default of Chaori Solar; another by NC here.
3/05/2014 Premier Lee Keqiang’s list of Chinese 2014 policy goals and SocGen’s analysis thereof; of course achieving them alongside a 7.5% growth rate is nigh impossible. Also implications of the potential default of Chaori Solar.
2/20/2014 ZH cites large quantity of research on the Chinese credit bubble; incredible.
2/19/2014 ZH compiles a list of likely upcoming Chinese trust defaults
2/16/2014 Michael Pettis’s insightful piece on Chinese banks’ share prices; ZH explains with videos “How China fooled the world” with credit creation.
2/12/2014 Report showing China’s coal industry firms trading at or below book value of assets, suggesting skepticism as to the quality of assets; predictions of 1/16/14 come true. (Also is coal rehypothecated into synthetics to the extent copper was?)
1/31/2014 On China’s Risky Credit Boom; interesting analysis with words rather than numbers.
1/29/2014 JP Morgan warns avoiding China defaults will now amplify future problem – shadow banking’s implicit assurance of government protection and bailout is probably resulting in moral hazard problems akin to those in the US shadow banking system circa 2007-2008. Note that some borrowers face rates of up to 20%. This chart in particular is shocking if true, indicating the shadow banking sector, depending on one’s definition of it, is 36% to 84% of China’s GDP; amazing. Interestingly, this later (and poorly sourced) Financial Times article seems to believe the shadow banking system is quite small; of course gross size isn’t as relevant as the likelihood of default, interlinkages, and the recovery rate on loans across the system.
1/16/2014 Excellent coverage of Chinese credit markets and the implications of “Credit Equals Gold #1 Collective Trust Product” shadow banking entity being on the verge of default. Map of the trust product; apparently coal is functioning as collateral which seems well, frankly, nuts – as global commodity demand is largely driven by China’s growth, if growth in China were to stall, commodity prices, e.g. shadow banking credit instrument loan collateral, will stall and then fall. I’m not sure to what extent margin-calls can be issued in the Chinese shadow banking system, but regardless if collateral value falls then potential balance sheet losses, which are systemically deflationary, accumulate in a corresponding magnitude. (Are these losses incurred explosively, asymptotically or linearly?)
- This commodity-based collateralization seems worryingly characteristic in China. If/when this bubble implodes, expect a massive deflationary shock to global commodity prices and thus emerging market (EM) balance sheets, thereby their economies, and in proxy, their political stability. This is a topic for revisiting under “global implications” of Chinese deflationary credit-shock, which, as manifested by the commodity linkages, will hit EMs far, far worse than the US housing bubble’s deflationary shock of 2007-2008 or even the ongoing EU sovereign debt crisis. (Perhaps this could be examined with econometric modeling?) Such shocks often result in interstate or instrastate war, as shown in the work of James Fearon, these guys, etc.
1/09/2014 Worries about Local Government Finance Vehicles (LGFV) as rates increase and the changing nature of shadow banking regulations under Doc 107.
1/07/2014 Michael Pettis considers China’s growth target of 7.5% GDP to be extremely implausible. Contains solid analysis of flaws in the Chinese growth model.
1/02/2014 George Soros on China
8/12/2013 China’s Ghost Cities
6/10/2013 Financial Times excellent series of Up Shibor Creek articles.
07/19/11 Exposing China’s Shadow Banking Industry, and so it begins. At the time SocGen was putting the size of China’s shadow banking sector at RMB10 trillion
Bank Run Models: