The last couple of weeks have seen reports of worrying signs emerge in the Chinese lending sector - see initial post and update. The prominence given to some of these reports might be questioned - some China observers are deeply polarized along political and economic lines.
If the reports are born out by a contraction in credit in Chinese markets - this will have knock on effects in Australia.
There are a couple of sectors in the lending market that are at risk. Last year, the sheer size of borrowing by local government agencies seemed to be the greatest risk. Earlier this year, the near default, default and then collapse of loans in the inherently risk laden trust sector came to the fore. Now we have a major collapse in the on-shore corporate bond market.
Trusts
The BBC has reported the recent bond default by Shanghai Chaori Solar Energy Science & Technology Co. (which used a number of inspiring slogans, including "Make the clean energy shine everyone").
The BBC has suggested that 2014 will see an increase in Chinese company defaults and an increasing number of consolidations - http://www.bbc.com/news/business-26464901. The BBC report is alarming. Other reports: Wall Street Journal, The Independant, Bloomberg. Bloomberg also noted suspension of trading for another solar manufacturer Baoding Tianwei Baobian Electric Co.
On-shore corporate bond market
Bloomberg is now reporting the imminent collapse of a major Chinese real estate developer with debts of $0.5T. Of related interest, the Wall Street Journal has run an interesting story about weakening sentiment in the Chinese real estate market - and puts numbers around the number of dwellings available in some centers over demand (usefully it gives an estimate of how long it will take for the market to absorb the excess stock).
In what might be related moves:
Interestingly, these proposed initiatives have been on the cards since last year. The release of the initiatives suggests that policy formulators are working to minimise broader economic dislocation - although there are also worrying claims that regulators may not be all on the same page - and may be competing for turf.
Allowing enterprises based on speculative investment to default, while devastating to investors, is probably a positive sign. However, the knock-on effects of major businesses collapsing with large debts will start to stress the Chinese financial infrastructure.
If the present churn results in reduced credit capacity - can China live with reduced credit and still maintain growth?
The ABC has reported that the ANZ Bank has reported on some of these developments.
Some of the side commentary has become tinged with alarmist predictions of social breakdown and even the collapse of the Chinese State (a theme in Taiwanese analysis for some decades). Economic dislocation comes at the price of social unrest. Still, some of the predictions of widespread collapse seems wishful thinking.
Still, some reflective analysis suggests that parts of the Chinese economy is in trouble.
Government action
With large economies it can be a mistake to simply focus on apparent weaknesses. Sometimes attention on weaknesses can be a deliberate play by competitors to weaken opposition for political, trading or financial gain. China has impressive industrial and intellectual capacity - strengths that can be undervalued in the West (eg, the recent delisting of a major Chinese gaming on the NYE company when the share price was undervalued by as much at seven times). As pointed out in earlier posts, China also has access to social and economic levers which are not generally applicable in the West. And it is not frightened to use them.In what might be related moves:
- the ABC reports that the Chinese banking regulator has announced the impending establishment of private banks (which would remove some small/micro sized companies requiring higher-risk lending from the direct control of state-run institutions).
- the New York Times reports that the Chinese Government has announced an ambitious plan for rural resettlement. This may deal with excess building - although a question remains about where rural emigrees will be able to find the financial capacity to enter a market (the present environment requires at least 10% deposits and up to 15% interest for first home buyers).
- the ABC has reported that the government has "extended the foreign exchange trading band for the renminbi, allowing it to rise and fall by a greater amount against the US dollar each day".
Interestingly, these proposed initiatives have been on the cards since last year. The release of the initiatives suggests that policy formulators are working to minimise broader economic dislocation - although there are also worrying claims that regulators may not be all on the same page - and may be competing for turf.
Allowing enterprises based on speculative investment to default, while devastating to investors, is probably a positive sign. However, the knock-on effects of major businesses collapsing with large debts will start to stress the Chinese financial infrastructure.
If the present churn results in reduced credit capacity - can China live with reduced credit and still maintain growth?
Analysis
Analysis is happening in this area from East Asia Forum - particularly Assistant Professor Sue Hsu and Andrew Collier (Managing Director of Orient Capital Research and was previously the President of Bank of China International).The ABC has reported that the ANZ Bank has reported on some of these developments.
Some of the side commentary has become tinged with alarmist predictions of social breakdown and even the collapse of the Chinese State (a theme in Taiwanese analysis for some decades). Economic dislocation comes at the price of social unrest. Still, some of the predictions of widespread collapse seems wishful thinking.
Still, some reflective analysis suggests that parts of the Chinese economy is in trouble.
Bottom line
It is still too early to call, but it is prudent to consider what might eventuate if the Chinese lending market weakens.
If it increases, economic dislocation might have the following consequences later in the year:
- impacts on the general Australian economy (reduced demand or failure of mining/energy exports)
- impacts on the Australian housing market (the economic shock may see a slump in sales and new building approvals, and reduced rental prices)
- impacts on Australian companies doing business in China (electric/solar/general components, garment manufacturers)
- impacts on guarantees (collapse of solar/component companies may see existing warranties - particularly of solar panel products - fail)
- travel warnings (increased social tensions within China and in the general region)
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