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Re: Yes Virginia...It's a Bubble...
The one advantage that China has if it ever does find itself in a credit induced banking squeeze is that it does not have to nationalize the banks...it already owns them. 
January 16, 2014
China crisis may be unavoidable
JUNHENG LI
Mainland policymakers and analysts commonly argue that China's public debt burden in itself is not a problem. They say that as long as gross domestic product growth outpaces credit growth, and that credit-driven growth generates a positive return on investments, all will be fine.
Originally posted by GRG55
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Repeat after me:
China property is a "cash market";
The Chinese government "won't let" the property market crash;
China has 1.1 Billion people that need homes so all the empty apartments will get filled;
It's different in China because a centrally planned economy and a totalitarian government can make and implement good economic decisions so much more quickly and effectively than the USA or any other democracy...
(feel free to add your own China myth to the list)
Misallocation of capital? In China? Perish the thought...
Last updated: April 16, 2013 5:32 pm
By Simon Rabinovitch in Beijing
A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash.
“We audited some local government bond issues and found them very dangerous, so we pulled out,” said Mr Zhang, who is also vice-chairman of China’s accounting association. “Most don’t have strong debt servicing abilities. Things could become very serious.”
The International Monetary Fund, rating agencies and investment banks have all raised concerns about Chinese government debt. But it is rare for a figure as established in the Chinese financial industry as Mr Zhang to issue such a stark warning.
“It is already out of control,” Mr Zhang said. “A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”...
...Last week, Fitch cut China’s sovereign credit rating, in the first such move by an international agency since 1999. On Tuesday, Moody’s cut its outlook for China’s rating from positive to stable.
Local governments are prohibited from directly raising debt, so they have used special purpose vehicles to circumvent these rules, issuing bonds under the vehicles’ names to fund infrastructure projects.
Investment companies owned by local governments sold Rmb283bn of bonds in the first quarter of 2013, more than double the total for the same period last year. Such an increase would normally be expected to boost the economy, but China’s growth unexpectedly slowed to 7.7 per cent in the first quarter of 2013...
...Mr Zhang said many local governments had invested in projects from public squares to road repairs that were generating lacklustre returns, and so were relying on financing rollovers to pay back their creditors. “The only thing you can do is issue new debt to repay the old,” he said. “But there will be some day down the line when this can’t go on.”
Mr Zhang added that he grew alarmed when smaller towns and counties discovered that investment vehicle bonds were an easy way to raise financing. “This evolution was quite frightening,” he said. “China has more than 2,800 counties. If every county issued debt, it could lead to a crisis. It could be even bigger than the US housing crisis.”...
China property is a "cash market";
The Chinese government "won't let" the property market crash;
China has 1.1 Billion people that need homes so all the empty apartments will get filled;
It's different in China because a centrally planned economy and a totalitarian government can make and implement good economic decisions so much more quickly and effectively than the USA or any other democracy...
(feel free to add your own China myth to the list)
Misallocation of capital? In China? Perish the thought...
Last updated: April 16, 2013 5:32 pm
By Simon Rabinovitch in Beijing
A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash.
Zhang Ke said his accounting firm, ShineWing, had all but stopped signing off on bond sales by local governments as a result of his concerns.
“We audited some local government bond issues and found them very dangerous, so we pulled out,” said Mr Zhang, who is also vice-chairman of China’s accounting association. “Most don’t have strong debt servicing abilities. Things could become very serious.”
The International Monetary Fund, rating agencies and investment banks have all raised concerns about Chinese government debt. But it is rare for a figure as established in the Chinese financial industry as Mr Zhang to issue such a stark warning.
“It is already out of control,” Mr Zhang said. “A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”...
...Last week, Fitch cut China’s sovereign credit rating, in the first such move by an international agency since 1999. On Tuesday, Moody’s cut its outlook for China’s rating from positive to stable.
Local governments are prohibited from directly raising debt, so they have used special purpose vehicles to circumvent these rules, issuing bonds under the vehicles’ names to fund infrastructure projects.
Investment companies owned by local governments sold Rmb283bn of bonds in the first quarter of 2013, more than double the total for the same period last year. Such an increase would normally be expected to boost the economy, but China’s growth unexpectedly slowed to 7.7 per cent in the first quarter of 2013...
...Mr Zhang said many local governments had invested in projects from public squares to road repairs that were generating lacklustre returns, and so were relying on financing rollovers to pay back their creditors. “The only thing you can do is issue new debt to repay the old,” he said. “But there will be some day down the line when this can’t go on.”
Mr Zhang added that he grew alarmed when smaller towns and counties discovered that investment vehicle bonds were an easy way to raise financing. “This evolution was quite frightening,” he said. “China has more than 2,800 counties. If every county issued debt, it could lead to a crisis. It could be even bigger than the US housing crisis.”...
January 16, 2014
China crisis may be unavoidable
JUNHENG LI
Mainland policymakers and analysts commonly argue that China's public debt burden in itself is not a problem. They say that as long as gross domestic product growth outpaces credit growth, and that credit-driven growth generates a positive return on investments, all will be fine.
The accuracy of the numbers reported last month by the National Audit Office is of course questionable. We see that, though, as less relevant than the government's intended message to the market: that overall debt is still manageable.
I, however, question the idea China can grow its way out of this problem. That's because, first of all, the debt issuers are not the primary beneficiaries of gross domestic product growth. The primary beneficiary of GDP growth is the central government, which gains in the form of tax revenues. Debt issuers, on the other hand, are mostly local and their primary revenue source is land sales.
There is no direct, mechanical or automatic link between economic growth and local authorities' debt service capacities, as we have witnessed since 2008 as total social financing, a broad measure of credit, has exploded.
The argument that China can grow out of its credit bubble is valid if and only if GDP growth increases the debt service capacity of the debtors. As GDP is only a measure of economic activity, not efficiency or profitability, GDP growth alone does not guarantee a proportional increase in the revenue of local authorities that could be used to pay down the debt issued via financing vehicles....
...Investments in city construction, land reserves, transportation facilities and social housing in mid-2013 made up 35%, 11%, 24% and 7%, respectively, of total spending by local authorities, according to Citigroup analysts.
Bulls would argue that these hard assets could be drawn on to repay the debt. But common sense dictates that financial returns from the physical assets funded by local government are largely unknown and most likely negative. If these projects were financially viable, why didn't local authorities invest in them prior to 2008 rather than waiting till the onset of the global financial crisis?...
...It is clear that policymakers in China are focused on engineering a transition to slower but more sustainable growth without causing a sharp cyclical slowdown. From an empirical perspective, however, the number of economies that have historically succeeded in letting the air out of a credit balloon in a gradual fashion, without creating a credit crunch and a short-lived recession, cannot be counted even on one finger.
Whether China will be different, given its unique policy tools and central planning instruments such as quantitative credit controls, is yet to be seen. Nevertheless, policy intervention comes with costs, mostly higher and more convoluted than anticipated.
One thing is certain: The consequences will be profound and long lasting for global economies and investors.
I, however, question the idea China can grow its way out of this problem. That's because, first of all, the debt issuers are not the primary beneficiaries of gross domestic product growth. The primary beneficiary of GDP growth is the central government, which gains in the form of tax revenues. Debt issuers, on the other hand, are mostly local and their primary revenue source is land sales.
There is no direct, mechanical or automatic link between economic growth and local authorities' debt service capacities, as we have witnessed since 2008 as total social financing, a broad measure of credit, has exploded.
The argument that China can grow out of its credit bubble is valid if and only if GDP growth increases the debt service capacity of the debtors. As GDP is only a measure of economic activity, not efficiency or profitability, GDP growth alone does not guarantee a proportional increase in the revenue of local authorities that could be used to pay down the debt issued via financing vehicles....
...Investments in city construction, land reserves, transportation facilities and social housing in mid-2013 made up 35%, 11%, 24% and 7%, respectively, of total spending by local authorities, according to Citigroup analysts.
Bulls would argue that these hard assets could be drawn on to repay the debt. But common sense dictates that financial returns from the physical assets funded by local government are largely unknown and most likely negative. If these projects were financially viable, why didn't local authorities invest in them prior to 2008 rather than waiting till the onset of the global financial crisis?...
...It is clear that policymakers in China are focused on engineering a transition to slower but more sustainable growth without causing a sharp cyclical slowdown. From an empirical perspective, however, the number of economies that have historically succeeded in letting the air out of a credit balloon in a gradual fashion, without creating a credit crunch and a short-lived recession, cannot be counted even on one finger.
Whether China will be different, given its unique policy tools and central planning instruments such as quantitative credit controls, is yet to be seen. Nevertheless, policy intervention comes with costs, mostly higher and more convoluted than anticipated.
One thing is certain: The consequences will be profound and long lasting for global economies and investors.
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