Suing yourself to get around Chinese currency export controls

Chinese millionaire sues himself through an offshore shell company to beat currency export controls

But there's a better way: for a small sum, you can just set up an offshore shell company, direct it to sue a Chinese company you own, throw the lawsuit, and then, oh well, I guess there's nothing for it but to send a bunch of cash to your shell company, exempted from export controls, in the form of court-ordered damages.

The Dollar Debt Shell Game

Feeling green

Yet there are still two reasons to worry. First, the outlook for China is a puzzle. The country holds $1.2 trillion in Treasury bills, many of which are sitting in its sovereign-wealth fund. When the dollar rises, the fund gets richer. But even in a dollar-rich country, there can be pockets of pain. China’s firms have built up a nasty currency mismatch. Almost 25% of corporate debt is dollar-denominated, but only 8.5% of corporate earnings are. Worse, this debt is concentrated, according to Morgan Stanley, with 5% of firms holding 50% of it.

Chinese property developers are the most obviously vulnerable. Companies like Evergrande, China Vanke and Wanda build and sell offices and houses, so most of their earnings are in yuan. Banned from borrowing directly from banks, they have been active issuers of dollar bonds. They have also borrowed from trust companies, according to Fitch, a rating agency. The trusts are themselves highly leveraged and have borrowed dollars via subsidiaries in Hong Kong. This arrangement will amplify the economic pain if property prices in China continue to decline, as they have been doing for several months.

When the post mortem on this next cycle is done, it will look a lot more like one long cycle than it does now.

Bubble update from China

China's property market represents 15% of GDP
China's money supply has increased 3x since 2008
July was the lowest for inflows in six years
China real estate: A bubble bursting?

"The exposure of China's banks (and now shadow banks) to real estate may look different than it did in the U.S., but it's very real. The main exposure is the reliance on property as collateral to support virtually all forms of lending throughout the economy, a situation that is very similar to Japan in the 1980s," he added, referring to a collapse in Japan's property market after a boom.

In recent weeks, mid-sized developers such as Hong-Kong listed Greentown China Holdings and Shui On Land issued profit warnings amid a downturn in the housing market.

China's Shadow Banking system estimated at US$4.4 Trillion

China's 'Shadow Banking' Sector Valued at $5.4 Trillion (Title is confusing, but context in the article supports the 4.4 number.)

A new report shows that China's "shadow banking" sector is now valued at 4.4 trillion US dollars. The Chinese Academy of Social Sciences report also warns of potential risks to the financial system.

Pawn shops, once banned, now US$11.83 billion dollar player in China's shadow banking system

China’s SMEs head for pawnbrokers as credit tightens

In such an environment SMEs often turn to family financing, underground banks and loan sharks to fund their operations. They are forced to pay eye-watering interest rates well into double-digits. By contrast, the average rate at a retail pawnshop is usually much lower. Step inside the retail unit of an upscale pawnbroker like Shanghai Hualian Pawn or Beijing’s Huaxia Pawnshop today and you’ll see the usual assortment of watches and jewellery that were common 20 years ago. But peer into an office behind the counter and you might well overhear negotiations for a loan in exchange for the keys to a luxury car or apartment deed. The average loan at a Chinese pawnbroker is about US$16,000 (RMB 100,000) versus US$150 in the US.

China's money supply rose 12% last year. That's low for them, and credit is scarce.

Reform is hard. As Credit Dries Up, Smaller Companies in China Feel the Pinch

At first glance, it seems extraordinary that anyone in China would have trouble finding credit, given how much money is already sloshing around the country. China’s broadly measured money supply passed that of the United States in August 2009, and it has been soaring ever since. China now has two-thirds more money than the United States, swirling through an economy that is a little over half the size of the United States’.

The central bank has been gradually pushing up open-market interest rates, in the hope that competition will start playing a greater role than political influence in deciding who can borrow money. That policy could help small and medium businesses obtain loans in the long term, but it has had the short-term effect of pushing up borrowing costs.

Chinese, Canadians, U.S. and Singapore big buyers of Australian Real Estate

Locals priced out by $24b Chinese property splurge

Wealthy Chinese buyers have purchased $24 billion of Australia housing in the past seven years, and over the next seven years an additional $44 billion will be spent on residential property, Credit Suisse estimates.

Chinese top the list of foreign investors in Australian residential property. Chinese top the list of foreign investors in Australian residential property. There was $17.2 billion worth of approved residential property investment coming in from overseas in the year June 30 2013, down from $19.7 billion in the previous period, according to the Foreign Investment Review Board.

Foreign money is roughly 5% of the entire market. Deutsche Bank economist pins high costs on low interest rates and domestic buyers. But first time buyers appear to be feeling the squeeze.

First-time buyers in February comprised less than 10 per cent of all mortgages processed by mortgage broker AFG for the first time since June 2010.

The article goes on to list the ways foreign investment could be avoiding FIRB approval.

Moving money from Shenzhen to Hong Kong on the black market

Inside China's Underground Black Market Banks

“We have a relative in Hong Kong who does business in Mainland China,” one of the Zhous said. “Once a week, he visits us to pick up Renmenbi for his import business, and in return he maintains a pool of Hong Kong Dollars for us across the border. He is family, so we trust him. We all avoid the official exchange rates, and everyone is happy.” Unless a client makes an extraordinarily request, this exchange involves about $500,000 per week, though it could be up to fivefold that amount if it is a public holiday, like during Golden Week in October.

Foreclosures in Wenzhou strain guarantee companies

15,000 foreclosed properties in Wenzhou pummeling guarantee companies

Nosedives in the Wenzhou property market of up to 50% have forced some property buyers to stop making payments to the lenders and drop their guarantees to companies as their mortgages have exceeded the property's market value. Many have literally abandoned property, a tremendous fallout for the city's 300 surviving guarantee companies,

The 300 guarantee companies capitalized on the "residual value of collateral," using the remaining quota in a property mortgage to leverage a second mortgage. For example, banks, out of safety concerns, typically approved a mortgage of about 60% of the evaluated value of the property, with 40% untouched. Guarantee companies will try to offer mortgages for the remaining 40%, and claim a service fee. The entire operation relies heavily on a stable property market.

Shadow Banking in China is a Symptom

Shadow banking as the symptom and not the disease

Why do these exist and why do regulators tolerate them? As Zhang rightly points out and a few commentators observed post-Saradha, shutting down shadow banks can be done but amounts to shooting the messenger. The real culprit is financial repression. In the absence of high-quality, formal options to save, invest and borrow, people are forced to deal with the more “shadowy” segments of the financial system. In its extreme form, investments in financial assets of any form are rejected in favour of physical assets. In its Financial Stability Report, RBI acknowledges that “the shift from financial assets to real estate and gold has become stark. Inflation, low penetration of banking services, credibility of financial institutions in the wake of mis-selling of products and financial frauds, low post-tax returns on bank deposits, negative/low real interest rates etc could be some of the issues that need to be addressed to re-direct non-financial savings towards financial savings”.

And the South China Morning Post
How interest rate controls created a shadow banking system in China

As a result, some depositors would like to receive a higher rate. At the same time, some borrowers and banks are willing to pay higher rates, because they can still make a profit on the higher rates. Thus the policy has created a shadow banking system paying a higher rate of interest than the official rate.

This is causing concern that these wealth management products are being used to "repackage old loans and prop up risky companies and projects", and that "shadow banking is helping drive the rapid growth of credit in a weakening economy, which could lead to - in the worst situation - a series of bank failures", the report said.

This author seems to think that bribery and the black market for money will vanish with liberalization of interest rates. But there will always be borrowers who do not qualify at any interest rate who will bribe for a loan at all or to fudge the rate. State enterprise itself uses its position to obtain unreasonably low rates and always will. Interest rate liberalization will not end corruption, it will squeeze out the middlemen who are repurposing loans for an allowed activity into a banned one, which will remove a level of corruption from large projects. Just because interest rates can float doesn't suddenly mean small business is going to get loans from a state bank.

China bans new government buildings for five years

This time they were also smart enough to ban some of the work arounds used to funnel money to construction during previous restrictions. China Orders Ban on New Government Buildings

Most tallies of total local government debt in China tend to be in the vicinity of $2 trillion, equal to three months of China’s entire economic output, but some estimates are even higher.

“We should put into perspective that the problem of local government spending on buildings is not the most serious problem facing China’s economy,” Mr. Li said in a telephone interview from Beijing. “The property bubble, shadow banking and the state-owned enterprise monopolies are far more risky.”

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.

Chinese influence on Australian Housing Bubble

Australian Housing Bubble Has Chinese Overtones

Australians have gone heavily into debt to buy houses that cost more than ever, especially the land component; and there's no sign this trend will end anytime soon. Mortgage debt has more than quadrupled from 19% of GDP in 1990 to 84% in 2012-- as high as that of the U.S. at its peak where mortgage debt as a percentage of GDP has fallen from 86% in 2009 to 68% in 2012. Negative gearing and easy lending combined to push house prices higher. Looking at affordability as a function of disposable income, both the ratio of total debt and interest payments to disposable income are very high - see the chart below. Widespread mortgage fraud to gain bank credit is asserted by Denise Brailey, the president of the Banking and Finance Consumer Support Association (an organization dedicated to protecting the public against predatory financiers).

Graph from Seeking Alpha

Australia's economy is experiencing increasing reliance on overseas funding, becoming more interlinked with China's growth and business cycle. The Chinese economy grew at 7.8% GDP in 2012, the slowest since 1999, and an increase in global commodity supplies could cause a sharp reduction in Australia's incomes and employment. Australia linked up with China in direct currency trading in March and this puts the country in a tenuous position if trade between the two countries slowed dramatically and would prompt a severe correction of home prices which some feel could take price all the way back to the 1990's.

China jails 1400 for loan sharking

China jails over 1,400 in loan-shark crackdown

People netted in the crackdown were convicted of violations including public advertising to find lenders and promising excessively high rates of return, Du said at a news conference. He gave no details. Legal experts say loans between individuals are legal and the government has failed to make clear what lenders and borrowers are allowed to do.

Loan sharks have a more balanced two-sided relationship with "clients" than the term implies in the west. They are known as much, or perhaps more so, as a means to invest for outsized returns than they are as place for the desperate to borrow. So this crackdown could theoretically been entirely over fundraising.

"Banks are offering fewer loans, because the bad loan rate is rising," said Zhou. "It is harder to get underground loans, too. People are more afraid of running the risk of lending money.

GDP growth is slowing while credit expands -- is China facing a great economic wall?

Has China's Economy Hit a ‘Dead End’?

Robust credit issuance – which rose by almost 60 percent in the first quarter from a year earlier – is no longer able to generate the same level of growth as it did compared to a decade ago, said analysts.

Back in the mid-2000s, one yuan of credit generated around one yuan of nominal GDP. In 2012, three yuan of credit generated around 1 yuan of nominal GDP, according to financial analysis firm IHS.

While the manufacturing index has returned to positive territory: China Manufacturing Index Hits 11 Month High

The purchasing managers index, a measure of economic expansion and contraction, reached 50.9 in March, slightly above the equilibrium mark of 50. It was 50.4 in January and 50.1 in February and has now remained above 50 for six consecutive months.

The CNBC article goes on to say:

Of the data released on Monday, economists say the most telling indicator of weakness in the economy is the deceleration in industrial production in March to 8.9 percent from an expected increase of over 10 percent. In August 2012 when hard landing fears were running high industrial production also grew at the same pace.

"We have lost confidence in a robust recovery," added Alistair Thornton, senior China economist at IHS

This IS the recovery. China's economy is a giant snake still digesting the bulk of the post crisis bailouts. Now we are just waiting around to see how skinny the snake really is without being force fed.

"While August 2012 proved the bottom for last year's downturn, we doubt March will be the turning-point for 2013, given macro policy has shifted to a tighter stance with renewed controls on the housing market, local government financing vehicles and wealth management products," Thornton said.

Okay, this is an unexpectedly short economic cycle (based on the calendar year?) being analyzed here. I don't know where to go with that.

Hat tip: Painted Turtle commenting at vancouvercondo.info

Kung Fu fighting against developer

Chinese Kung Fu Expert Beats Up Men Who Came To Evict Him From Home

At first, the property company stuck up posters warning of dire consequences for any families who held out. Then, Mr Shen said, when 70 of the 100 households had left, the threats escalated. "This mob of thugs would block the street most days. They would pick on the women, threatening to kill their kids. Then people started tossing bricks through windows and letting off fireworks at night. Some people got beaten on the street."

On October 29, as Mr Shen went to work and his wife popped out for a packet of instant noodles, a mob of "30 to 50 men" materialised at their front door. "My wife tried to close the door, but they pushed it back and she tripped over. That is how the fight started," said Mr Shen. With a flurry of kicks and punches, he and his 18-year-old son, a fellow kung fu devotee, set about the attackers, rendering seven of them near unconscious in the hallway.

Shen went to Beijing and after a call from the Central Military Commission has been unreachable.

China's prices down 6% since start of Feb

It's been a China extravaganza in the news lately. China Gets Tough on Property Sales

China's cabinet, or State Council, said Friday that it plans to enforce a 20 percent capital gains tax on the sale of second-hand homes, as well as higher downpayments and interest rates. Mainland China has tumbled more than six percent since the start of February as government interference with property prices has loomed.

While this has ripple effects — the Australian dollar has weakened — this does not appear to be the start of an economy-wide credit squeeze. Instead, it appears to be limited to the property sector.

60 Minutes Covers the China Real Estate Bubble

Covers the ghost cities. Claims 12 to 24 new cities being built every year. Malls with make-believe brand signs. Multiple classes will be wiped out when the bubble bursts: multigenerational family savings, construction workers. Shanghai average apartment costs 45 times average salary. The fake Manhattan in the port city of Tianjin has ceased development. City officials claim they stopped because they want to put on all the facades at once so they match, but workers say otherwise. First sign of the crash is the migrant workers go home and in this development, at least, they have. Price declines have led to demonstrations outside developers. The head of Vanke worries that a real burst could lead to an Arab Spring situation.

100 Judges Assigned to Bad Debt Resolution

Wenzhou City Assigns 100 Judges to Resolve Bad Loans, News Says

The judges will work with 50 to 100 financial institutions starting next month to deal with soured assets in the city’s banking system, the state news agency reported yesterday, citing unidentified court officials. Wenzhou’s non-performing loans have soared to 23.86 billion yuan ($3.8 billion), from 8.6 billion yuan in 2011, according to the news agency.

That's the trouble with a shadow banking system, it doesn't have a reserve.

The judges will provide legal assistance to companies that have promising outlooks, while weeding out failing enterprises in industries with high pollution and energy consumption through bankruptcy, the news service said.

The Chinese are about to learn about the creative destruction portion of the economic cycle.

China's Phoenix Island Real Estate Market has Imploded

China’s riskiest property market just collapsed. Is this how it starts?

In some ways (but not all), China is even more exposed to the dangers of a real estate collapse than America was. Washington Post business reporter Jia Lynn Yang pointed out last fall that urban housing stock constituted 41 percent of Chinese household wealth of 2011. The number was 26 percent in the U.S. In other words, Chinese families tend to invest almost twice as much of their money in urban real estate than do American families. So, if you thought Americans were hit hard when that real estate suddenly lost value, it could be even worse for Chinese, who also tend to put much more of their earnings into long-term investments than do Americans. That said, it would also take a bigger drop in prices for the market to collapse, as Chinese buyers tend to put down larger down payments.

And here’s the really scary number: 13 percent of Chinese GDP in 2011 came from real estate investment. 13 percent! If that investment stalls abruptly, as it did in Phoenix Island, the rest of the Chinese economy could follow. That could cause political instability in China and, much more certainly, would set back the global economy.

“As long as the money supply keeps expanding aggressively (15%+ per year), and people (absent alternatives) are willing to plow that money into real estate and hold it, this [real estate market] can persist for some time,” Chovanec explains in an e-mail. “But when the flow of new money slows — either because of the need to rein in inflation, including housing inflation, or the need to roll over and refinance bad debt (often at rising rates of interest) — the whole thing begins to unravel.”

More on Phoenix Island Collapse

Chinese manufacturers once snapped up its luxury apartments, but with profits falling as a result of the global downturn many owners need to offload properties urgently and raise cash to repay business loans, estate agents said.

Now apartments on Phoenix Island which reached the dizzying heights of 150,000 yuan per square metre ($2,200 per square foot) in 2010 are on offer for just 70,000 yuan, said Sun Zhe, a local estate agent.

"China had a lending boom... and so if people are using property as a place to stash their cash, they had more cash to stash," said Patrick Chanovec, a professor at Beijing's Tsinghua university.

"At some point they want to get their money out, then you find out if there are really people who are willing to pay those high prices."

Surprise, it's only worth what someone can pay for it.