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How China Just Implemented A Stealth Bailout Bigger Than One And A Half Tarps

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http://www.zerohedge.com/article/how-china-just-implemented-stealth-bailout-bigger-one-and-half-tarps

While the rest of the world is transfixed by the latest pocket change bailout of the Eurozone, China has stealthily conducted an economic rescue bigger than than one and a half TARPs. Dylan Grice's latest note focuses on the key news out of China from last week which oddly received very little media attention, namely the onboarding by the Local Government Financing Vehicles (LGFV) of $463 billion in bad loans made to various infrastructure and development projects as part of the Chinese stimulus package. This is nothing short of a bailout the likes of TARP when Paulson transferred billions of toxic debt to the government's balance sheet. The reason why this is actually a much bigger deal than perceived is that as Grice notes, a "bail-out of $463bn is half the size of the TARP, introduced by Paulson at the nadir of the 2008 crisis, for an economy which is only one-third the size of the US. So adjusted for GDP, China has just announced an emergency bail out of one and a half TARPs!! If we calibrate the magnitude of the economic crisis with the size of the bail-out, one and a half TARPs implies a financial crisis one and half times the order of magnitude of 2008." In other words, China very quietly and stealthily buried a massive bailout with just one passing Reuters mention. And nobody cares... Or more specifically, those who have long held a very bearish view on China, should certainly care, as what happened is that the unwind catalyst, so critical for most China bearish theses, was just pushed back by several years. And since China is full to the gills with excess dollars, all that happened was that the government effectively diverted money that would have been otherwise recycled to purchase US paper, in the form of a government fund to bail out it own. Crisis averted as another centrally planned regime managed to do what the Fed and the ECB have been doing so well for nearly 3 years now.

From SocGen's Dylan Grice:

Last week saw perhaps the starkest example yet of China's "Great Suppression." Reuters reported that China's central government was taking on responsibility for up to $463bn of bad loans made to Local Government Financing Vehicles (LGFV) which had been made to fund various infrastructure and development projects as a part of the stimulus package. It's not clear yet how this will be done, but I suspect the template will be similar to that used during the recapitalisations of Chinese banks in the 1998-2005 period. Asset management companies buy the bad assets, which they pay for with non-tradable government guaranteed bonds which don't show up in the official measures of government debt. Maybe this is why the story didn't get much attention: China's government throws money at a problem - problem goes away - boring story - move on.

But the problem hasn't gone away. Think carefully about what's just happened. A bail-out of $463bn is half the size of the TARP, introduced by Paulson at the nadir of the 2008 crisis, for an economy which is only one-third the size of the US. So adjusted for GDP, China has just announced an emergency bail out of one and a half TARPs!! If we calibrate the magnitude of the economic crisis with the size of the bail-out, one and a half TARPs implies a financial crisis one and half times the order of magnitude of 2008.

Haven't the LGFV been involved heavily in land/property speculation? Still at least they might have managed to kick another can a bit further down the road.

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http://chovanec.wordpress.com/2011/06/02/beijings-bad-debt-bailout-problem-solved/

Here are a couple reasons I think it’s premature to declare this problem “solved”:

First, this is the tip of the iceberg. As I pointed out in my earlier post on “Chinese Banks’ Illusory Earnings,” LGFV loans are only one category of risky loans we should be worried about. In fact, when China’s lending boom was first blossoming, in early 2009, LGFV loans were the ones China’s banking regulators were least worried about, on the assumption that the government would step in and back them if necessary. They only began attracting attention after Northwestern professor Victor Shih tallied up the potential exposure to this one type of loan, arguing that China’s official figures for public debt understated the government’s real obligations. The banking sector’s exposure to other types of risky loans – mortgages, real estate development loans, emergency working capital loans to keep failing exporters from going under, business loans diverted to stock and real estate speculation, business loans collateralized by land at inflated valuations, bonds issued to finance China’s ambitious high-speed rail build-out – is far more extensive, and not so easy to rationalize as a public obligation.

Even within the LGFV category, RMB 2-3 trillion is only a fraction of the potential losses China’s banks may end up facing. As David Cui of Bank of America-Merrill Lynch Global Research writes:

LGFV loans are at Rmb10tr by the government’s estimate; the ones with no cashflow support, i.e. those public service projects mostly, amount to Rmb2-3tr; given the initial estimate tends to under-estimate the scale of most problems, e.g. subprime & PIGS debt to just name a few, we suspect the above numbers are a best-case scenario rather than a worst-case scenario.

Based on the numbers I’ve seen, the RMB 2-3 trillion corresponds (roughly) to the 23% of LGFV loans regulators believe are beyond all hope of repayment. However, only 28% of LGFV loans can be reliably repaid through cash flow. That may leave 50% (roughly RMB 5 trillion) in problematic LGFV loans that remain to be worked out.

Second, the devil is in the details. If you read the fine print of the government’s plan, it looks like, rather than simply paying back the failed LGFV loans out of taxpayer funds, regulators will oversee the refinancing of these loans in the form of local, provincial, or central government bonds. If China’s last bank bailout is any signpost, that most likely will involve a significant portion of the bad debts being buried deep off balance sheet, represented at face value by unbacked securities that will be indefinitely rolled over, with the buried losses never being recognized either by the lenders or the government. Or as David Cui puts it:

We suspect that, initially, most of the bad loans will be shifted off balance sheet via AMC bonds/MoF IOUs, similar to what happened in 1998-2005. When the day of reckoning arrives, i.e. the eventual write-off, via MoF bonds or PBoC printing money. At the beginning and at a minimum, it seems to us that the banks will be stuck with some “perpetual” low yield assets (AMC bonds/MoF IOUs) on their balance sheet.

At best, China is repackaging the debt and kicking the can down the road. At worst, it will be temporarily lightening the loan on local governments and giving them the freedom and means to take on even more debt.

Great news it's all off balance sheet.

And it's possible only the tip of the iceberg of bad debts.

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And since China is full to the gills with excess dollars, all that happened was that the government effectively diverted money that would have been otherwise recycled to purchase US paper, in the form of a government fund to bail out it own. Crisis averted as another centrally planned regime managed to do what the Fed and the ECB have been doing so well for nearly 3 years now.

They haven't used dollars though have they.

They've used renminbi that they'd already created against their dollar reserves (or by creating fresh govt debt).

They get new dollars for recycling into US bonds from their trade surplus and renminbi printing is the result, not the other way around.

The usual Zero hedge bollux I'm afraid.

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They haven't used dollars though have they.

They've used renminbi that they'd already created against their dollar reserves (or by creating fresh govt debt).

They get new dollars for recycling into US bonds from their trade surplus and renminbi printing is the result, not the other way around.

The usual Zero hedge bollux I'm afraid.

Your a huge fan I can tell. :lol:

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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