Currency Crisis At Chinese Banks 'could Trigger Global Meltdown’

[Sancho Panza]

Telegraph 1/2/14

'The growing problems in the Chinese banking system could spill over into a wider financial crisis, one of the most respected analysts of China's lenders has warned. Charlene Chu, a former senior analyst at Fitch in Beijing and now the head of Asian research at Autonomous Research, said the rapid expansion of foreign-currency borrowing meant a crisis in China's financial system was becoming a bigger risk for international banks.

"One of the reasons why the situation in China has been so stable up to this point is that, unlike many emerging markets, there is very, very little reliance on foreign funding. As that changes, it obviously increases their vulnerability to swings in foreign investor appetite," said Ms Chu in an interview with The Telegraph.

Ms Chu has been warning since 2009 about the growth of a shadow banking system in China that has helped fuel the credit expansion seen in the country in the wake of the Western financial crisis.

However, fears are growing that the build-up of foreign borrowing by the Chinese, particularly in US dollars, is creating an even greater build-up of risk than that seen before the crisis of 2008.

Figures published by the Bank for International Settlements (BIS) in October showed foreign currency loans booked in China, as well as cross-border borrowing by Chinese companies, had reached $880bn (£535bn) as of March 2013, from $270bn in 2009.

Analysts say this figure is now likely to exceed $1 trillion and is continuing to grow, raising the prospect of the potentially dangerous vulnerability of the Chinese financial system to a rising dollar.

"It is very hard to work out the exposures of individual banks to the Chinese financial system, but it seems to us there are some very large numbers on some of the bank's balance sheets," said the analyst.

"Without a doubt, that has been on the rise [foreign currency borrowing] and was really starting to grow fast in the latter half of last year and it's only going to continue. For the time being, it is only a fraction compared to the massive size of the financial sector, but still we're talking about a growing amount of funding coming from offshore sources," she said.

"You look at the exposure numbers from the BIS and the Hong Kong banks . .. you're going to encounter a few [foreign] institutions that are going to have a sizeable exposure to China."

George Magnus, senior independent economist at UBS, said the Chinese banking system resembled that of Japan during the 1980s in the years leading up to the country's financial crash.

"If the dollar were to appreciate it could cause problems for those banks that have borrowed in dollars. Anywhere you have a banking system that uses a non-domestic currency, there is a possibility of a mismatch that could cause issues when the value of your liabilities runs away from you," said Mr Magnus.

The BIS figures show foreign-currency loans are already at a decade high, though the body said there was no reason this should mean there was a "currency mismatch".'

[TheCountOfNowhere]

it was the Chinese to blame...

wars have been started over less.

[dances with sheeple]

Bring it on.

Edited February 2, 2014 by dances with sheeple

[wonderpup]

It seems only yesterday that serious economic commentators were assuring us that China would simply 'de-couple' from the western banking system and continue on it's inevitable rise to world domination.

Is there any penalty for failure in the world of Economics- any downside at all to making such gross errors of prediction?- if not then it's got to be the easiest job in the world- all you need do is cobble together some vaguely plausible narrative, bank the salary checks and when your predictions fall totally flat who cares? By the time your last fabrication has proved utterly false you have already moved onto the next.

And they pay people to do this?

[Killer Bunny]

George Magnus, senior independent economist at UBS, said the Chinese banking system resembled that of Japan during the 1980s in the years leading up to the country's financial crash.

Yeah right

Edited February 2, 2014 by Killer Bunny

[erat_forte]

It seems only yesterday that serious economic commentators were assuring us that China would simply 'de-couple' from the western banking system and continue on it's inevitable rise to world domination.

Is there any penalty for failure in the world of Economics- any downside at all to making such gross errors of prediction?- if not then it's got to be the easiest job in the world- all you need do is cobble together some vaguely plausible narrative, bank the salary checks and when your predictions fall totally flat who cares? By the time your last fabrication has proved utterly false you have already moved onto the next.

And they pay people to do this?

I think it's an in group / out group thing.

The in group uses money from the out group, to pay each other handsomly.

It's like contemporary art. If you are an "artist" (in group) you can go "I know, an empty cardboard box!!!" and the gallery pays you £50k for it. If you are not an artist you are not going to get listened to let alone paid for anything.

I think Economics is the same. If you are an Economist you can go on Telly and say whatever you like. If you are not an "economist" tough luck, carry on whistling into the wind.

[Saving For a Space Ship]

Chinese burn

[@contradevian]

"The problem that started in America err China."

[Sancho Panza]

Telegraph 1/2/14

'The $15 trillion shadow over Chinese banks

Drawing attention to the problems at an individual bank is never likely to make you popular, but calling time on an entire financial system is another thing entirely. For eight years, until her resignation last month, Fitch banks analyst Charlene Chu has done just that, warning of the impending collapse of China's debt-fuelled bubble.

Born and raised in America and a graduate of Yale, she has claimed in painful detail that China has embarked on an unprecedented experiment in credit expansion that far exceeds anything seen before the financial crisis that rocked Western markets six years ago.

Working out of Beijing, Chu has developed a reputation that has seen her hailed by some of the world's most important money managers as a "heroine" and treated as a pariah by some within China's financial elite.

In a country where the banks, even the largest, are not known for openness, Chu has warned since 2009 about a rapid expansion in lending that has seen something close to $15 trillion (£9.1 trillion) of credit created, fuelling a property and infrastructure boom that has no equal in history.

To say her warnings have been unusual is to underestimate quite how important her contributions have been. Chu has explained the creation – from a standing start just five years ago – of a shadow banking industry in China that today is responsible for as many loans in terms of volume as the country's entire mainstream financial system.

Speaking for the first time since her departure from Fitch last year, Chu, who has taken a new job at Autonomous, the respected independent research firm, says she remains adamant that a Chinese banking collapse of some description remains not just an outside chance, but a certainty.

"The banking sector has extended $14 trillion to $15 trillion in the span of five years. There's no way that we are not going to have massive problems in China," she says.

Behind these problems lie a baffling range of "trusts", "wealth management products" and foreign-currency borrowings that have allowed indebtedness to expand even as the authorities have attempted to clamp down on mainstream lending by the big banks.

Chu's warnings have carried particular weight in recent weeks as the Industrial and Commercial Bank of China backed away from a 3bn renminbi (£297m) trust it had sold to its customers. The move prompted fears this could become China's "Bear Stearns moment", a reference to the abandonment by the defunct US broker of several sub-prime funds in the early stages of the West's 2007 credit crisis.

In the event, a default of the ICBC trust was averted, but Ms Chu remains clear that the linkage between the official banking system and its shadow twin remains a threat.

"Banks are often involved behind-the-scenes in a lot of this shadow product," she said. "It's one reason why I am always emphasising this idea that is often pushed by Chinese economists and academics that the shadow banking sector and the formal banking sector are separate and therefore, if the shadow banking sector falls apart, it does not matter.

"I just don't agree with that because there is so much inter-linkage between the formal banking sector and the shadow banking sector and this product [the ICBC trust] is a good example." Many take comfort that foreign currency reserves, estimated at close to $4 trillion, could be used to rescue the financial system in a crisis. Chu says such optimism is wishful thinking.

"The FX [foreign exchange] reserves cannot be used nearly to the extent that people think they can. There are some analysts that think they can't be used at all, but I disagree with that.

"I believe they can't be used in their entirety by any means because they are offset by the other side of the balance sheet of the PBOC [People's Bank of China]. Because of that, you can't just run down one side of the balance sheet, the asset side, and not deal with the liability side of the PBOC balance sheet."

However, while Chu questions the ability of the authorities to throw money at the problem, she also says there are several reasons to think a Chinese crisis would not take the form of that seen in the West. "This is going to be different from other markets where market forces are allowed to play out. Here the authorities get involved and that means these kind of defaults can remain one-off and isolated for quite a while," she says.

"The critical question is that, at some point are these one-off issues going to turn into a very big wave of defaults? That is going to be very difficult for the authorities to manage in the same way that they have been able to manage the one-offs."

Taking such a pessimistic view of China's banks has not made Chu popular either with the authorities or the lenders. Her previous employer, Fitch, last year became the first of the three main ratings agencies in 14 years to cut China's credit rating, largely based on her analysis.

Fitch and Chu both remain circumspect about how her exposure of the problems of the banks has affected business.

Chu admits that her views have made her job harder, in particular the effort to uncover decent data on what is going on inside the system. On the other hand, she adds that not being beholden to the "party line" has enabled her to analyse China more dispassionately than others.

"I still feel like, in the end, being on the outside has not hurt me too much in terms of what is going on." Not following the party line has seen Chu travel to China to inspect first-hand the building of "ghost cities" that developers claim are fully occupied, but that appear to be deserted except for a scattering of maintenance staff and increasingly despondent "entrepreneurs".

"The odd thing is that you will certainly encounter some developments that appear to be totally empty and yet they are totally sold out," says Chu. "It is a very mixed picture, but I do feel in the end that the amount of real estate building that has gone on over the last few years is substantial, yet there are still a lot of projects in the works. There is definitely reason for people to be worried that we have got a real estate bubble."

The popping of this bubble could leave behind a very different China, and it is the post-crisis economy that is Chu's biggest concern.

Like the West, which has implemented an array of new regulations in the wake of the crash, Chu worries that China could find it difficult to adapt to a slower pace of growth.

"This isn't a developed market with a very strong social safety net. If we get to a situation where we are having severe financial sector problems, the chances are GDP growth is much slower than it is now for a prolonged period of time," she says. Adding: "I think that really is where the cost of a financial sector crisis comes in. To me, it's much less about how much the sovereign issues in terms of debt to bail out the financial sector. It comes down to how much of a hit does growth take and what is the impact of that on the populace and do we start to have any other issues that arise from that?"

Chu says that many in China's policy elite realise the Faustian pact the country has made but, with the economy and political system so dependent on maintaining a 7pc rate of growth, there is little will to take away the punchbowl any time soon.

And that is the problem. While a crisis now would be bad, allowing the current situation to persist will only make the final reckoning that much worse, particularly for the wider international financial system.

Warnings have already been raised about the increased use of offshore dollar funding by mainland Chinese borrowers. The Hong Kong Monetary Authority has pointed to the growth of foreign currency funding of China, which is believed to have more than quadrupled in the past three years to in excess of $1 trillion.

Chu says that this remains a side issue, arguing that the longer the credit boom is allowed to continue the bigger the international leg of the crisis will become.

"One of the reasons why the situation in China has been so stable up to this point is that unlike many emerging markets there is very, very little reliance on foreign funding," she said.

"As that changes it obviously increases the vulnerability to swings in foreign investor appetite. I do think, in the end, you look at the exposure numbers from the BIS [bank for International Settlements] and the Hong Kong banks and you're going to encounter a few institutions that are going to have a sizeable exposure to China."

As the problems in the Chinese financial system become harder to ignore, it is likely Chu's opinions are going to be increasingly sought as investors look for insight on what is going on in the world's second-largest economy.'

Edited February 3, 2014 by Sancho Panza

[Sancho Panza]

Ooohhh, big scarey numbers which we couldn't possibly have any idea of because they're hidden from view and really complex.

I must sell everything.

I think you've got to stay at the table till you see the casino owners heading to the exits with strong boxes in their arms.Look how long it took for 2007/8 to happen.

[zugzwang]

I think you've got to stay at the table till you see the casino owners heading to the exits with strong boxes in their arms.Look how long it took for 2007/8 to happen.

AFAIK Chinese ratlines to places like the Caymans and the British Virgin Islands really took off prior to the handover of Hong Kong in 1997. When the Communists took over in HK the City of London already had a network of other jurisdictions ready and willing to do the laundry. Every year since these places have got busier, at least 10% of Chinese 'foreign investment' now originates in the BVI. most it tax avoidance capital being repatriated to the mainland.

http://www.financialtransparency.org/2011/05/23/why-do-so-many-chinese-companies-use-the-bvi/

[Sancho Panza]

There is no doubt in my mind that China IS the deflationary black hole at the heart of the global economy and that it will suffer a Great Depression greater than the US's. It is as much to do with over capacity and loss of pricing power as it is with 'debt'.

However, if you are going to make investment decisions on it, timing is everything. And you can't time using these sorts of 'stories'. You'll be very poor if you do.

EDIT: I really like to read Michael Pettis for informed opinion on China:

Latest blogpost from a few days ago:

http://blog.mpettis....form-on-growth/

Absolutely.If this decade and a half has taught me anything,it's to wait for the turn and never to try and pre empt it.

Thanks for that Pettis post.

He did a great podcast lat year with FT Alphaville with some very wise words in the first few mins on 'debt capacity'.Just in case you didn't catch it.

http://ftalphaville.ft.com/2013/07/12/1566782/alphachat-michael-pettis-edition-well-the-second-one/

[Sancho Panza]

AFAIK Chinese ratlines to places like the Caymans and the British Virgin Islands really took off prior to the handover of Hong Kong in 1997. When the Communists took over in HK the City of London already had a network of other jurisdictions ready and willing to do the laundry. Every year since these places have got busier, at least 10% of Chinese 'foreign investment' now originates in the BVI. most it tax avoidance capital being repatriated to the mainland.

http://www.financial...es-use-the-bvi/

Intersting.Thanks for that.

[ticket2ride]

If you are an Economist you can go on Telly and say whatever you like. If you are not an "economist" tough luck, carry on whistling into the wind.

Not true at the BBC. They have a very inclusive, open-door policy. I think we should hear what

has to say about the impending Chinese meltdown. Edited February 3, 2014 by ticket2ride