Sunday, June 28, 2009

Waking up next to the Paper Dragon...

...mainstream media is quickly "getting it". Original article here.

By Ambrose Evans-Pritchard
Published: 5:38PM BST 28 Jun 2009

China's banks are veering out of control. The half-reformed economy of
the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new
lending issued since December.

Money is leaking instead into Shanghai's stock casino, or being used
to keep bankrupt builders on life support. It is doing very little to
help lift the world economy out of slump.

Fitch Ratings has been warning for some time that China's lenders are
wading into dangerous waters, but its latest report is even grimmer
than bears had suspected.

"With much of the world immersed in crisis, China appears to be one of
the few countries where the financial system continues to function
largely without a glitch, but Fitch is growing increasingly wary," it

"Future losses on stimulus could turn out to be larger than expected,
and it is unclear what share the central and/or local governments
ultimately will be willing or able to bear."

Note the phrase "able to bear". Fitch's "macro-prudential risk"
indicator for China threatens to jump from category 1 (safe) to
category 3 (Iceland, et al). This is a surprise to me but Michael
Pettis from Beijing University says China's public debt may be as high
as 50pc-70pc of GDP when "correctly counted".

The regime is so hellbent on meeting its growth target of 8pc that it
has given banks an implicit guarantee for what Fitch calls a "massive
lending spree".

Bank exposure to corporate debt has reached $4,200bn. It is rising at
a 30pc rate, even as profits contract at a 35pc rate.

Fitch traces the 2009 bubble to the central bank's decision to cut
interest on reserves to 0.72pc. Bankers responded to this "margin
squeeze" by ramping up the volume of lending instead. Over half the
new debt is short-term. Roll-over risk is rocketing. China's monetary
stimulus since November is arguably more extreme than the post-Lehman
printing of the US Federal Reserve, though less obvious to the
untrained eye.

Under the Taylor Rule, US policy remains tight (for the US). China's
policy is loose (for China). New loans doubled in May from a year
earlier, almost entirely to companies.

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