Tuesday, June 18, 2013

China Credit Bubble is Unprecedented

Total credit has jumped from $9 trillion to $23 trillion since the Lehman crisis and is now 200% of GDP. Each additional Yuan of loans now generates only 0.15 in growth compared to .85 four years ago.

Fitch says China credit bubble unprecedented in modern world history
"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph.

While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. "It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property," she said.
Large project loans over the last decade are reputed to sometimes have no repayment requirement at all, loans plus accumulated unpaid interest were simply rolled into a new loan.

But now the house of cards is starting to wobble. Trust products are starting to default on their short term loans. $2 Trillion in wealth products act as a shadow banking system allowing banks to end run around regulation.

It also flagged worries over an exodus of hot money once the US Federal Reserve starts tightening. "China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens," it wrote.

The journal said foreign withdrawals from Chinese equity funds were the highest since early 2008 in the week up to June 5, and withdrawals from Hong Kong funds were the most in a decade.
There are several economies that will be strained when the U.S. ends QE.

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