Chinese Currency Tumbles To 19-Month Lows As Bad Debts Hit 5 Year Highs
Submitted by Tyler Durden on 05/27/2014 22:27 -0400
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As we discussed previously, delinquent loans in China are a problem... and a growing one. It seems that news is finally starting to filter to a mainstream audience as Bloomberg reports that China’s biggest banks are poised to report the highest proportion of bad debts since 2009 after late payments on loans surged to a five-year high, indicating borrowers are struggling amid an economic slowdown.As S&P warns,"overdue loans are a leading indicator of asset-quality deterioration and show the rising liquidity constraints among borrowers... and the disturbing thing is the end is nowhere in sight." CNY has pluned almost 150 pips to new 19-month lows on the news.
China bad debt at multi-year highs...
CNY is plunging in the news - back to its lowest against the USD in 19 months...
These numbers tell us that it does not appear that China can bear a very large increase in debt, and that the idea that the government can simply “bail out the financial sector” is erroneous, or at least, a stretch.China does not have the luxury of the United States, which can spend excessively because foreign countries continue to buy U.S. government debt (as the dollar is the world reserve currency). If the leadership attempts to spend down its large cache of dollar reserves, it will lose control of its currency, as a larger supply of U.S. dollars relative to the Chinese RMB would depreciate the currency unless sterilized.The only remaining option is the least savory: the Chinese government must control its debt, and this includes reducing overindulgence within the real economy. It seems that the punch bowl is empty already and the party is winding down. Now the question is, who will clean up the mess?
But as S&P warns:
"Overdue loans are a leading indicator of asset-quality deterioration and show the rising liquidity constraints among borrowers,” said Liao Qiang, a Beijing-based director at Standard & Poor’s.“While we believe Chinese banks’ credit woes will unfold gradually, the disturbing thing is that the end is nowhere in sight.”
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Economists discuss China's financial leverage
A number of leading Chinese economists have noted international concerns over China's financial leverage during recent economic seminars, reports Shanghai's National Business Daily.
"Despite stable credit-loan growth, high financial leverage of Chinese enterprises has evoked international concern," said Zhou Xiaochuan, governor of the People's Bank of China, the country's central bank, at the 2014 Boao Forum for Asia held in southern China's Hainan province from April 1 to 8.
Xu Nuojin, deputy director of the central bank's statistics and analysis department, estimated the leverage ratio of China's non-financial enterprises at 106% in 2012 and 109.6% in 2013, much higher than the corresponding levels of 49% in Germany, 72% in the US and 99% in Japan in 2013. Xu made the remarks during a financial forum on May 17.
According to a report released at the forum, central bank official Yao Yudong and two co-authors said that the leverage ratio of non-financial Chinese enterprises has topped 140%, placing enterprises on the brink of a debt crisis. The mounting debt servicing (repayment) cost has kept squeezing economic re-development funds, thus undermining the potential economic growth rate and expanding the risk of default.
Yao told the forum that 80% of the outstanding debts in the corporate sector stem from state-run enterprises, and their debt repayment has been grown at a rate higher than their profit growth rate.
Meanwhile, Xu Nuojin said that non-financial Chinese enterprises are bearing debts in various forms, mainly bank loans, corporate bonds, trust financing, adding that their leverage ratio has been closely associated with economic growth cycles. Thanks to fast economic growth, the leverage ratio of the enterprises dropped rapidly during 2004-2008 and the ratio surged quickly in 2009, as enterprises took on massive bank loans before declining slowly in 2010-2011. But the ratio soared again in 2012-2013, due to the economic slowdown.
The decline of economic growth has not only caused banks to suffer mounting bad loans, but also pushed enterprises into operating predicaments. The mounting leverage ratio of Chinese enterprises and their increasingly heavy financial cost have further undermined their investment ability and operating income, thereby exposing them to the risk of debt crisis and hampering economic growth, the paper said.
Figures compiled by the Ministry of Finance showed that aggregate revenues of state-run enterprises surged sharply from 21 trillion yuan (US$3.4 trillion) in 2008 to 46.5 trillion yuan (US$7.4 trillion) last year. But their profits grew by only 5.9% in 2013, while their annual financial spending growth rate jumped 33.5% in 2012, a far cry from 3.2% in 2008, before the growth rate dropped to 8.5% in 2013 and surging again to 19.3% in the first quarter of 2014.
"This indicates that the growth of financial spending by state-run enterprises has outpaced their profit growth rate, a phenomenon that should not be ignored," Yao said in reference to the ministry's figures.
Nevertheless, officials and scholars present at the aforementioned roundtable meeting shared the view that China's overall leverage ratio is still within a controllable range, and that it's not a wise practice to blindly reduce the ratio.
In 2012, China's overall leverage ratio, measured by the leverage ratios of non-financial enterprises, residents, households, and financial enterprises, reached around 183%, much lower than the average corresponding ratio of 350% recorded by advanced economies such as Japan, Great Britain, and the US, according to Xu.
"China's debts are mainly held by the domestic sector, and externally, China is a creditor nation. The country's national savings rate is higher than the investment rate, and its balance of payments still scores a twin surplus, making the overall debt risk remain controllable," he said.