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Zombie Borrowers Haunt China's Shadow Banks

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Call it the new China Syndrome: Although Asia's biggest economy is slowing down markedly, credit continues to surge. Dead-end projects and dying industries are sucking up an ever-larger portion of new credit, while more productive borrowers are starved for funds.

Nowhere is this more evident than in China's shadow banking sector, the non-bank financiers that have pumped credit into the economy at a spectacular rate. Trust companies - firms that sell investment products to Chinese savers and use the proceeds to make loans or buy other types of assets - have posted the fastest growth.

A Reuters examination of proprietary data shows that as little as half of trust loans issued in 2012 were used to finance current economic activity, such as a new investment project or increased production at an existing factory.

The other half may have been used for refinancing old debt that funded past projects but is no longer contributing to economic growth.

The finding offers a possible explanation for the growing disconnect between lending and growth in China. Many analysts have expressed concern that the so-called "credit intensity" of Chinese growth is increasing. Ever more borrowing is required to produce the same amount of economic output. But no one is sure why.

It's going into property isn't it? Don't these people understand how a nation creates wealth, you need a nation of property spivs to generate the nirvana of wealth.

Looks like China is creeping towards it's own banking crisis which is going to give the Communist party no end of problems.

When the Trust companies go in full reverse and the losses come it will be a repeat of what happened in the late 20's America. There is no financial innovation it's just the rebadging of leverage for the dumb.

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Does normal-saver ever get a chance to buy assets at distressed lower prices on any sort of open market? Or they just go to investment firms who buy the debt at a fraction of former value, take possession, keep the asset price high, and float it off in a new property-trust.

China locks foreign investors out of another bad-debt cleanup

Mon Sep 9, 2013 3:03am EDT

(Reuters) - Chinese banks have a colossal mess of bad debts to clean up for the second time in as many decades, but they are unlikely to call in the financial world's most efficient mop and broom.


Apart from concerns over some smaller banks, there are an estimated $5 trillion worth of loans sitting outside the formal banking system, putting stress on the financial system. No one has a clear idea of how heavy defaults in this shadow banking sector could rebound on the formal banking sector.

Such a climate would be normally a good one for foreign institutions specializing in buying up bad debts. Apart from the global investment banks, these include Apollo Global Management (APO.N), Oaktree Capital Management, S.C. Lowy, Clearwater Capital, Pacific Harbor and Shoreline Capital, to name a few.

But in the case of China, either banks won't sell their debts at a price foreigners would consider reasonable or the foreigners are worried they will not be able to enforce their rights as creditor when it comes time to collect a bad debt.


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