http://globaleconomicanalysis.blogspot.com/2012/08/ponzi-bank-financing-of-wealth.html
Chinese Banks’ Weapons of Mass Ponzi
Financial Times Alphaville picked up on the story in Chinese Banks’ Weapons of Mass Ponzi
There’s no knowing when, how or if some kind of liquidity crisis might happen in the Chinese banking system, but there are plenty of possible triggers to be found.
A story on Tuesday in China Daily cited a study by The Chinese Banker that found capital shortfalls among the five biggest banks would grow sharply in 2012 and 2013. The China Daily link is now broken, unfortunately, [Mish Note: the link is now working] but Chinascope Financial has a summary:
Alphaville totaled the above numbers and came up with a capital shortfall of Rmb 244.7 billion for 2012 and a Rmb 340.2 billion shortfall by the end of 2013.
While converting Rmb 244.7 billion to US dollars (the answer is $72.11 billion), I accidentally stumbled across the Rmb 244.7 billion figure in KPMG China's weekly banking news summary
Better than expected earnings exactly match expected capital shortfalls. Fancy that.
Poway, Golden Elephants, and Pay Option ARMs
This setup sounds much like the "better than expected earnings" reports by US banks in 2006 on Pay Option ARMs. No money came in to banks but accrued interest added to the bottom line (until the deferred payment scheme on questionable assets blew sky high).
Poway vs. "Golden Elephant"
"Golden Elephant" also sounds like the Ponzi scheme in Poway, California.
Poway borrowed $105 million and will defer interest and principal payments for 20 years at which time Poway will owe $1 billion.
For further details, please see Ponzi Financing in Poway California Based on Massively Rising Property Values
Regarding Poway, I was asked "Who is dumber, the city of Poway or the bank that made the loan?"
That's a good question. Certainly the bank that originated the loan will not be paid back if they hold this loan to term. But did they keep it? Given the fiasco in Pay Option ARMs I rather doubt it.
Indeed, I highly suspect the bank that originated the deal sold the loan to some unsuspecting pension plan such as CALPers, or perhaps some plan covering Poway itself.
and....
http://soberlook.com/2012/08/chinas-painful-adjustment-to.html?utm_source=BP_recent
Nationally export growth of 1% YoY would not be viewed as a disaster in many nations these days, but it feels like one in China.
An unexpected decline in new domestic loans still follows a reasonable long-term growth path but may also feel like a disaster.
And interest rates dropping to new lows, forecasting slower growth, is the global reality that is difficult for many in China to accept.
Unprepared for this reality, domestic industries and markets are once again expecting more government stimulus. Beijing however is not yet ready to revert to heavy infrastructure projects of 2009 (which caused a number of problems), and is trying new creative ways of stimulating domestic demand to compensate for declining exports.
The risk to the nation's power structure however is that the Communist leadership will fall under more scritiny going forward. At 12% growth rate people may look the other way, but at half that rate - which would be a dream-come-true for most developed nations - social unrest may become an issue once again.
Saturday, August 11, 2012 11:30 AM
Ponzi Bank Financing of "Wealth Management Products" in China Backed by Dubious Real Estate Projects; "Golden Elephants", Poway, and Pay Option ARMs
Top Chinese banks are involved in Ponzi financing of investment deals, offering interest rates over 7% to depositors, to finance real estate projects gone bust and other projects whose assets are not even disclosed.
Banks label these schemes "Wealth Management Products" (WMPs) but any individuls foolish enough to invest in them are going to lose money, perhaps all of it.
Reuters explains in a special report China's answer to subprime bets: the "Golden Elephant"
Banks label these schemes "Wealth Management Products" (WMPs) but any individuls foolish enough to invest in them are going to lose money, perhaps all of it.
Reuters explains in a special report China's answer to subprime bets: the "Golden Elephant"
The Chinese investment vehicle known as "Golden Elephant No. 38" promises buyers a 7.2 percent return per year. That's more than double the rate offered on savings accounts nationally.
Absent from the product's prospectus is any indication of the asset underpinning Golden Elephant: a near-empty housing project in the rural town of Taihe, at the end of a dirt path amid rice fields in one of China's poorest provinces.
"They haven't even built a proper road here," said Li Chun, a car repairman, who said he lives in the project. "The local government is holding onto the flats and only wants to sell them when prices go up."
Golden Elephant No. 38 is one of thousands of "wealth-management products", instruments aimed at monied investors, which have shown phenomenal growth over the last five years. Sales of them soared 43 percent in the first half of 2012 to 12.14 trillion yuan ($1.90 trillion), according to a report by CN Benefit, a Chinese wealth-management consultancy.
They are usually created in China's "shadow banking" system - non-banking institutions that are not subject to the same regulations as banks - which has grown to account for around a fifth of all new financing in China.
Like the subprime-debt lending spree in the United States that helped spark the 2008 financial crisis, the products are often opaque, and usually dependent on high-risk underlying assets, such as the Taihe housing project.
Chinese Banks’ Weapons of Mass Ponzi
Financial Times Alphaville picked up on the story in Chinese Banks’ Weapons of Mass Ponzi
We wrote last week that China’s shadow banking system was reflecting and, to an extent, contributing to a growing liquidity risk which in turn is being exacerbated by net capital outflows. Since then, there have been some interesting revelations on the domestic liquidity management, especially in shadow banking, and especially especially in wealth management products.
To recap, wealth management products or WMPs are a little like a term deposit, only they offer Chinese investors a more appealing rate of return than a normal bank deposit (which will deliver a negative real return) and it can be backed by assets — effectively, an informal securitisation.
If you’re wondering what sort of assets that includes, Reuters wrote up an excellent investigation of the WMP scene, beginning with the case study of “Golden Elephant no. 38″ which promises a 7.5 per cent return. It shows just how illiquid some of these things are.
At the same time as the risks around WMP issuance are gaining attention, something else is going on in Chinese financial system: interbank assets are surging, as Also Sprach Analyst points out.
There’s no knowing when, how or if some kind of liquidity crisis might happen in the Chinese banking system, but there are plenty of possible triggers to be found.
A story on Tuesday in China Daily cited a study by The Chinese Banker that found capital shortfalls among the five biggest banks would grow sharply in 2012 and 2013. The China Daily link is now broken, unfortunately, [Mish Note: the link is now working] but Chinascope Financial has a summary:
"Data from the report shows that capital shortfall in China’s major five state-owned banks in 2012 will be: CNY 60.4 billion (Industrial and Commercial Bank of China), CNY 63.5 billion (Agricultural Bank of China), CNY 37.6 billion (Bank of China), CNY 35.4 billion (China Construction Bank), and CNY 47.8 billion (Bank of Communications). By the end of 2013, the capital gap of the five banks will further increase to CNY 69.1 billion, CNY 83.8 billion, CNY 78.7 billion, CNY 39.9 billion and CNY 68.7 billion, respectively."Capital Shortfalls
Alphaville totaled the above numbers and came up with a capital shortfall of Rmb 244.7 billion for 2012 and a Rmb 340.2 billion shortfall by the end of 2013.
While converting Rmb 244.7 billion to US dollars (the answer is $72.11 billion), I accidentally stumbled across the Rmb 244.7 billion figure in KPMG China's weekly banking news summary
Better than expected profits from Chinese banks
Ten Chinese commercial banks have reported better than expected net profits of RMB 244.7 billion (USD 72.11 billion) in the first half of 2011, approximately 30 percent more than the net profits reported for the same period in 2010. The increase was boosted by strong growth in the banks’ net interest income and intermediary business.
Better than expected earnings exactly match expected capital shortfalls. Fancy that.
Poway, Golden Elephants, and Pay Option ARMs
This setup sounds much like the "better than expected earnings" reports by US banks in 2006 on Pay Option ARMs. No money came in to banks but accrued interest added to the bottom line (until the deferred payment scheme on questionable assets blew sky high).
Poway vs. "Golden Elephant"
"Golden Elephant" also sounds like the Ponzi scheme in Poway, California.
Poway borrowed $105 million and will defer interest and principal payments for 20 years at which time Poway will owe $1 billion.
For further details, please see Ponzi Financing in Poway California Based on Massively Rising Property Values
Regarding Poway, I was asked "Who is dumber, the city of Poway or the bank that made the loan?"
That's a good question. Certainly the bank that originated the loan will not be paid back if they hold this loan to term. But did they keep it? Given the fiasco in Pay Option ARMs I rather doubt it.
Indeed, I highly suspect the bank that originated the deal sold the loan to some unsuspecting pension plan such as CALPers, or perhaps some plan covering Poway itself.
and....
http://soberlook.com/2012/08/chinas-painful-adjustment-to.html?utm_source=BP_recent
FRIDAY, AUGUST 10, 2012
China's painful adjustment to sustainable rate of growth
ISI Group: - China’s July exports, imports and trade balance were all weak, mirroring global economic performance and encouraging Beijing to react with stimulus. Any stimulus will be welcome, but far more welcome would be economic conditions that did not require a rescue effort. No wonder Beijing won’t let itscurrency rise against the USD. Together with yesterday’s IVA, FAI and Retail Sales data, China looks weak – except when compared to everywhere else.Somewhat unprepared for the new reality, China is quickly and involuntarily shifting into more sustainable levels of growth. The double digit growth had become embedded in expectations for jobs creation, property value growth, export expansion, demand for raw materials, etc. Return on investment expectations for retail, institutional, and corporate investors have also fallen into the comforts of double digit returns. But it's time to adjust these expectations. Gone are the days of investing in a new factory and generating 25% or higher IRR. Housing developments no longer provide such returns either. The "easy money" is gone.
Nationally export growth of 1% YoY would not be viewed as a disaster in many nations these days, but it feels like one in China.
 |
| China export growth YoY (source: Bloomberg) |
An unexpected decline in new domestic loans still follows a reasonable long-term growth path but may also feel like a disaster.
 |
| Monthly CNY loans in China (source: Bloomberg) |
And interest rates dropping to new lows, forecasting slower growth, is the global reality that is difficult for many in China to accept.
 |
| 1y domestic (SHIBOR) interest rate swap (source: Bloomberg) |
Unprepared for this reality, domestic industries and markets are once again expecting more government stimulus. Beijing however is not yet ready to revert to heavy infrastructure projects of 2009 (which caused a number of problems), and is trying new creative ways of stimulating domestic demand to compensate for declining exports.
Reuters: - Chinese companies will subsidies purchases of kitchen appliances from Friday in a trial aimed at boosting domestic consumption, an industry body said, the latest step to lift China's economy which is mired in its worst slowdown in three years.
Shoppers buying home appliances including microwave ovens, electric cookers, electric fans and extraction fans will be subsidized by as much as 10 percent of the sales price, the China Household Electrical Appliances Association said.More of such programs/subsidies will be announced in the near future. They will look similar to"Cash for Clunkers" and "First-Time Homebuyer Credit" in the US - all short-term boosts to growth. The hope is that these programs (combined with looser monetary policy) will transition the country to more sustainable growth rates without major economic disruptions (that may feel like a "hard landing").
...
The private-sector plan ["encouraged" by the central government] mirrors one run by the government, which has earmarked 26.5 billion yuan ($4.17 billion) in subsidies for energy-saving home appliances.
The risk to the nation's power structure however is that the Communist leadership will fall under more scritiny going forward. At 12% growth rate people may look the other way, but at half that rate - which would be a dream-come-true for most developed nations - social unrest may become an issue once again.
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