China's debt bomb looks ready to explode

[Hydrogen]

Many warning signs suggesting that a debt reckoning is imminent

Minxin Pei is professor of government at Claremont McKenna College and a nonresident senior fellow of the German Marshall Fund of the United States.

Confidence in the safety of Chinese banks has been badly shaken by the failure of several small banks in Henan Province in April this year. In terms of their assets of about 40 billion yuan ($6 billion) and the number of customers, roughly 400,000, the shuttered rural banks are minions in China's financial system.

The implosion of these poorly supervised and likely corruption-ridden financial institutions should not be surprising. But how local authorities handled the fallout is shocking even to the most jaded observers of China's political scene.

Instead of compensating the depositors, who are entitled to up to 500,000 yuan, according to government regulations, officials in Henan have done everything imaginable to silence them.

They initially restricted the movement of the depositors by turning the COVID test code on their smartphones red, which effectively made it impossible for them to take public transportation or even drive their own cars. A public outcry forced the Henan government to abandon this abusive tactic.

But when several hundred depositors unable to gain access to their savings in the failed banks gathered on July 10 to protest in front of the People's Bank branch office in Zhengzhou, capital of Henan, local officials sent in a large number of thugs who viciously assaulted the depositors, with uniformed police officers looking on.

This scandal should alarm investors not simply because of the brutal tactics used by local authorities eager to cover it up but because of the circumstances under which these small banks failed.

Ever since China began to binge on debt to fuel its growth in 2009, many have wondered how long the party could go on. To the chagrin of many bearish observers, predictions of a financial crisis have not panned out. Today, China's banking system is still standing despite a debt-to-GDP ratio of 264%.

Perhaps because Beijing seems to be able to defy financial gravity, fewer people these days worry that its ballooning debt could unleash a systemic crisis. But there are many warning signs indicating that China may face a debt reckoning soon.

Weak supervision, poor risk management and corruption that likely drove the small rural banks in Henan into insolvency are systemic among the country's nearly 4,000 small and medium-sized banks with nearly $14 trillion assets.

It is highly likely that other similar banks will fail soon. By pure coincidence, when Henan authorities were cracking down on the victims of bank failure there, authorities in Shanghai had put on trial, in secret, a former billionaire who allegedly controlled a medium-sized bank in Inner Mongolia and used it to fund various illicit schemes. When the government seized the failed bank in 2019, the bailout cost several billion dollars.

If a large number of small banks fail together, such an event could produce a chain reaction threatening the stability of the financial sector. Their counterparties and lenders, especially bigger banks, could suffer massive losses. Confidence in China's shadow banking system, through which small banks attract funds with a higher interest rate, will likely evaporate.

The chances of such a financial meltdown are much higher today than before. One of the reasons that China has avoided a financial crisis in the last decade is that its economy managed to grow at a reasonably high rate, averaging 6.8% a year from 2011 to 2020. A faster-growing economy normally makes it easier to manage or even conceal the debt burden.

But as the Chinese economy is now slowing down rapidly, in part due to Beijing's zero-COVID policy, the debt bomb is ticking much louder.

The most ominous warning light is clearly China's debt-ridden real estate sector. China Evergrande Group, the country's largest real estate developer, which has borrowed more than $300 billion, has already defaulted on its bonds. More defaults seem likely because Chinese developers are on the hook for $13 billion in dollar-denominated bond payments in the second half of this year.

China's debt-laden local governments are also facing grim prospects. Declining income from land sales because of the crisis in the real estate sector and falling tax receipts are expected to cause a 6 trillion yuan shortfall, roughly $900 billion, in local government revenues this year. Local government financing vehicles that have borrowed heavily from banks or issued bonds will have great difficulties servicing their debt.

Large banks in China are in trouble as well. They have lent tens of billions to poor countries as part of China's ambitious Belt and Road Initiative. A significant portion of their credit portfolio is likely to become nonperforming as their borrowers are unable to service the debt due to the global economic downturn.

The most recent economic implosion and the collapse of the government of Sri Lanka will likely force their Chinese lenders to write off a large portion of the loans. If big Chinese banks themselves face rising nonperforming loans abroad, they will be less able to help bail out insolvent small or medium-sized banks at home.

It might be possible for China to dodge another financial meltdown this time. But if local officials have to hire thugs to attack bank customers trying to get their money back, investors should brace for far worse days ahead for China's banking sector.

https://asia.nikkei.com/Opinion/China-s-debt-bomb-looks-ready-to-explode

....



It is possible that china's economy is imploding at the moment. The united states $50 billion dollars in ukraine funds, might have gone to china. To stabilize their economy and prevent global collapse. This could be one reason behind the united states currently throwing "additional funding" at ukraine. And funding additional near $1 trillion dollar packages.

A high percentage of funds could be diverted into china, to bailout their economy as credit and debt bubbles pop.

None of this would be remarkable if it was true. The united states has bailed out many foreign banks since the TARP bill was passed post 2008 economic crisis. The federal reserve claims every dollar it loaned to foreign banks has been paid back prior to the 2020 pandemic.

What is remarkable about these trends is if the united states economy flounders and the US government doesn't settle debt issues. America might find itself in a position where it can no longer bail out china, and other banks and lagging economies of the world. What happens then? It would be nice if we could plan ahead for likely scenarios. However it doesn't appear to be a high priority within the grand scheme of things.

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[zasad@]

Latest article on this topic
What’s in Store for China’s Mortgage Market?
https://carnegieendowment.org/chinafinancialmarkets/87664
In every country there are banks that have been bankrupt for a long time, because they are pursuing the wrong financial policy.
This information will not be known in all countries.

[dothebeats]

It's amazing how China, one of the countries with highest debts, is able to lend out unimaginable amounts to other small countries with exorbitant interests. The US seem to 'condemn' China's ways, but still wants to bail it on its enormous debt when the time comes. I guess there is no turning back to this massive bubble that the Chinese created and directed upon themselves. This kind of tactic to grow the economy can only go so far.  Once the bubble pops, the whole world will certainly be affected, and we will experience yet another shaky future ahead of us.

Knowing that the Chinese government is very secretive when it comes to imperfections and negatives in its country, I wonder how bad the situation really is?

[TheNineClub]

Is it possible? Yes. But that dosen't mean that much because most of the issues can be offset by givernment meassures. It's not the first time a big player like that had economic issues (great depression wink wink), and in some cases they got through it even stronger.

[Haunebu]

This is certainly news to me. I never expected a big talker like China to be in so much debt and still badmouth the US whenever they get the chance. Shows that they're all talk at the end of the day.

They have the gall to make threats related to Pelosi's recent visit to Taiwan when their economy itself is clearly unstable. Surprisingly stupid tactics.

I truly hope that the US economy doesn't collapse at any point in the future since it would definitely lead to a worldwide recession which would suck big-time especially after the COVID debacle.

[DrBeer]

China's problem is that ... the Chinese economy is the most natural and largest bubble in the world economy, in world history! And the funny thing is that the Chinese economy is exactly the same as the crisis of 2009, when the real estate bubble burst! They did the same, only within the local market. And the result was not long in coming. But in the case of the Chinese economy, everything will be even worse - not a segment of the market, but the entire economy will collapse, because. In China, the domestic market is very "fragile" and everything is highly dependent on all internal processes. After the "explosion" of the real estate market, the construction-related market has already begun to crumble (from the production of concrete, building metal to manufacturers of electrical wiring, laminate and household kitchen appliances) ... And these are millions of workers who will soon be left without work, companies will stop paying taxes , and .. and further in a vicious circle. The only thing to say is that this will not happen this year for sure, China still has some inertia.

PS by the way - the United States officially began to withdraw production and technology from China, and transfer it to the United States, to solve 2 problems:
1. Solve internal problems, "burn" tons of money printed, give new jobs and boost the US economy. At the same time, provide their manufacturers with microelectronics (microchips, etc.)
2. Show China its place, and force it to be more accommodating.

[goaldigger]

Is it possible? Yes. But that dosen't mean that much because most of the issues can be offset by givernment meassures. It's not the first time a big player like that had economic issues (great depression wink wink), and in some cases they got through it even stronger.

From real estate problem in China and with their local banks failure to operate accordingly, they are telling something here and big recession might happen if the bubble started to burst which can affect the world as well since China is a big exported of many products. The 2009 crisis might still left China on the same place and with their current issues, it’s possible to make thing more worst. With the US bailout, I guess they can’t do this with China’s failing banks since the number is too much, and their funds is quiet focused in something else, China should take actions now or else many will suffer more.

[paxmao]

Many warning signs suggesting that a debt reckoning is imminent

Minxin Pei is professor of government at Claremont McKenna College and a nonresident senior fellow of the German Marshall Fund of the United States.

Confidence in the safety of Chinese banks has been badly shaken by the failure of several small banks in Henan Province in April this year. In terms of their assets of about 40 billion yuan ($6 billion) and the number of customers, roughly 400,000, the shuttered rural banks are minions in China's financial system.

The implosion of these poorly supervised and likely corruption-ridden financial institutions should not be surprising. But how local authorities handled the fallout is shocking even to the most jaded observers of China's political scene.

Instead of compensating the depositors, who are entitled to up to 500,000 yuan, according to government regulations, officials in Henan have done everything imaginable to silence them.

They initially restricted the movement of the depositors by turning the COVID test code on their smartphones red, which effectively made it impossible for them to take public transportation or even drive their own cars. A public outcry forced the Henan government to abandon this abusive tactic.

But when several hundred depositors unable to gain access to their savings in the failed banks gathered on July 10 to protest in front of the People's Bank branch office in Zhengzhou, capital of Henan, local officials sent in a large number of thugs who viciously assaulted the depositors, with uniformed police officers looking on.

This scandal should alarm investors not simply because of the brutal tactics used by local authorities eager to cover it up but because of the circumstances under which these small banks failed.

Ever since China began to binge on debt to fuel its growth in 2009, many have wondered how long the party could go on. To the chagrin of many bearish observers, predictions of a financial crisis have not panned out. Today, China's banking system is still standing despite a debt-to-GDP ratio of 264%.

Perhaps because Beijing seems to be able to defy financial gravity, fewer people these days worry that its ballooning debt could unleash a systemic crisis. But there are many warning signs indicating that China may face a debt reckoning soon.

Weak supervision, poor risk management and corruption that likely drove the small rural banks in Henan into insolvency are systemic among the country's nearly 4,000 small and medium-sized banks with nearly $14 trillion assets.

It is highly likely that other similar banks will fail soon. By pure coincidence, when Henan authorities were cracking down on the victims of bank failure there, authorities in Shanghai had put on trial, in secret, a former billionaire who allegedly controlled a medium-sized bank in Inner Mongolia and used it to fund various illicit schemes. When the government seized the failed bank in 2019, the bailout cost several billion dollars.

If a large number of small banks fail together, such an event could produce a chain reaction threatening the stability of the financial sector. Their counterparties and lenders, especially bigger banks, could suffer massive losses. Confidence in China's shadow banking system, through which small banks attract funds with a higher interest rate, will likely evaporate.

The chances of such a financial meltdown are much higher today than before. One of the reasons that China has avoided a financial crisis in the last decade is that its economy managed to grow at a reasonably high rate, averaging 6.8% a year from 2011 to 2020. A faster-growing economy normally makes it easier to manage or even conceal the debt burden.

But as the Chinese economy is now slowing down rapidly, in part due to Beijing's zero-COVID policy, the debt bomb is ticking much louder.

The most ominous warning light is clearly China's debt-ridden real estate sector. China Evergrande Group, the country's largest real estate developer, which has borrowed more than $300 billion, has already defaulted on its bonds. More defaults seem likely because Chinese developers are on the hook for $13 billion in dollar-denominated bond payments in the second half of this year.

China's debt-laden local governments are also facing grim prospects. Declining income from land sales because of the crisis in the real estate sector and falling tax receipts are expected to cause a 6 trillion yuan shortfall, roughly $900 billion, in local government revenues this year. Local government financing vehicles that have borrowed heavily from banks or issued bonds will have great difficulties servicing their debt.

Large banks in China are in trouble as well. They have lent tens of billions to poor countries as part of China's ambitious Belt and Road Initiative. A significant portion of their credit portfolio is likely to become nonperforming as their borrowers are unable to service the debt due to the global economic downturn.

The most recent economic implosion and the collapse of the government of Sri Lanka will likely force their Chinese lenders to write off a large portion of the loans. If big Chinese banks themselves face rising nonperforming loans abroad, they will be less able to help bail out insolvent small or medium-sized banks at home.

It might be possible for China to dodge another financial meltdown this time. But if local officials have to hire thugs to attack bank customers trying to get their money back, investors should brace for far worse days ahead for China's banking sector.

https://asia.nikkei.com/Opinion/China-s-debt-bomb-looks-ready-to-explode

....



It is possible that china's economy is imploding at the moment. The united states $50 billion dollars in ukraine funds, might have gone to china. To stabilize their economy and prevent global collapse. This could be one reason behind the united states currently throwing "additional funding" at ukraine. And funding additional near $1 trillion dollar packages.

A high percentage of funds could be diverted into china, to bailout their economy as credit and debt bubbles pop.

None of this would be remarkable if it was true. The united states has bailed out many foreign banks since the TARP bill was passed post 2008 economic crisis. The federal reserve claims every dollar it loaned to foreign banks has been paid back prior to the 2020 pandemic.

What is remarkable about these trends is if the united states economy flounders and the US government doesn't settle debt issues. America might find itself in a position where it can no longer bail out china, and other banks and lagging economies of the world. What happens then? It would be nice if we could plan ahead for likely scenarios. However it doesn't appear to be a high priority within the grand scheme of things.

China is a major holder of US securities. It would not make sense to divert funds to "save China's banks" since despite the large debt, China itself does seem to hold enough reserves (nearly 3.15 trillion USD) to be able to confront a situation such as the one described in the article. The interest rate of Yuan is not particularly high or low so there is not a clear indication of problems.

[DrBeer]

China is a major holder of US securities. It would not make sense to divert funds to "save China's banks" since despite the large debt, China itself does seem to hold enough reserves (nearly 3.15 trillion USD) to be able to confront a situation such as the one described in the article. The interest rate of Yuan is not particularly high or low so there is not a clear indication of problems.

The problem is that as of May 2022, only one real estate market, and only 3 companies, have “generated” several hundred BILLIONS of dollars worth of bad debts. This is just the initial problem. It is extremely difficult to imagine what we will entail, an artificially contained crisis. But as history shows, there is only one way out - to borrow real money somewhere, in huge quantities. Without this, a kind of chain reaction of the destruction of the financial and economic system of China will begin (most likely it has already begun), and an increase in internal tension, which will soon give rise to a strong explosion!

[Drawesome]

I believe they have to make a lot of redistribution so the balance tally, but they have a huge income and they are not going to let their system to fail easily.

[pooya87]

Today, China's banking system is still standing despite a debt-to-GDP ratio of 264%.

Is the author confusing Japan with China?!
All the sources I look up on the internet are reporting a 250-260% debt-to-GDP ratio for Japan, and about 60% for China and 130-150% for United States!

Another interesting thing I found out while searching was that among the countries with biggest debts and debt-to-GDP ratio are a lot of European countries. Such as Greece, Italy and Portugal.
Example: https://www.visualcapitalist.com/global-debt-to-gdp-ratio/ (China=69%).

[davis196]

It is possible that china's economy is imploding at the moment. The united states $50 billion dollars in ukraine funds, might have gone to china. To stabilize their economy and prevent global collapse. This could be one reason behind the united states currently throwing "additional funding" at ukraine. And funding additional near $1 trillion dollar packages.

A high percentage of funds could be diverted into china, to bailout their economy as credit and debt bubbles pop.

The USA sending financial aid and bailing out China? Why would they do such thing?
Sending billions of US dollars to China, in order to help them keep their financial bubble from bursting seems like a stupid idea.
USA and China are competitors(and probably future enemies), you don't help your competitor/enemy when he is having problems.
I know that China has lots of hidden debt and their financial sector is a giant bubble. The bubble will burst sooner or later and this is a positive thing for the economy. I'm sure that China will keep it's position of "global factory", but it will never become a global financial center.
Maybe many western banks and corporations will be damaged by a big crisis in China, but the western world might have a chance to revive it's industry, rather than outsourcing it into another underdeveloped country.

[stompix]

Is the author confusing Japan with China?!
All the sources I look up on the internet are reporting a 250-260% debt-to-GDP ratio for Japan, and about 60% for China and 130-150% for United States!

As always, your sources are good for nothing, exactly the third result in google:
Directly from South China Morning Post (owned by the CCP)
https://www.scmp.com/economy/china-economy/article/3135883/china-debt-has-it-changed-2021-and-how-big-it-now

China’s overall debt was 270.1 per cent of gross domestic product at the end of 2020, up from 246.5 per cent at the end of 2019

This's because China splits its debt, local governments, local authorities, and companies despite being owned by the state have each their own reporting but in all cases is the government that owns all of it.

It is possible that china's economy is imploding at the moment. The united states $50 billion dollars in ukraine funds, might have gone to china. To stabilize their economy and prevent global collapse. This could be one reason behind the united states currently throwing "additional funding" at ukraine. And funding additional near $1 trillion dollar packages.

I don't know what you're smoking but quit it! Lend-lease doesn't work like that, and the US has no reason to pay China's debt, if they wanted that they could settle this between them as both countries own part of each's debt.

[edgycorner]

Is it possible? Yes. But that dosen't mean that much because most of the issues can be offset by givernment meassures. It's not the first time a big player like that had economic issues (great depression wink wink), and in some cases they got through it even stronger.

But this situation is unprecedented. More than 30% of China's GDP directly depends on real estate market and that's a lot. These events will set china back by a decade and it's certain to happen(Probably by mid-September)

I believe they have to make a lot of redistribution so the balance tally, but they have a huge income and they are not going to let their system to fail easily.

You can't write money into existence without even worse consequences(inflation).



Why would US help them tho? A failing Chinese economy will be golden for US here, they will get the goods for cheap and favourable terms in future deals.
If anything, US will try to accelerate their fall else it will be US in the meat grinder

[pooya87]

Why would US help them tho?

The question is not why, it is "can they save China". It seems like both US and Chinese economies are falling apart. We already have recession in US with high inflation and not to mention that all sources report a huge national debt and a high debt-to-GDP ratio. They both need bailout and with increasing energy prices it won't happen any time soon.
Here is a scary counter: https://www.usdebtclock.org/world-debt-clock.html

[kensaii]

The US isn't that vulnerable to the high debt-to-GDP ratio since the petrol dollar and dollar as the main currency for world trade, main in foreign reserves of many countries. Same with Japan cause they are the world's biggest creditor, and fund their money to oversea under ADB's loans to developing countries. US and Japan will be fine.
China? Not so much since they have had the real-estate bubble problem for years but never address it. The covid pandemic last year affect the whole world and this somehow take a toll on China's real-estate bubble. Forced their central government to tighten the bank's interest rate for the construction sector, housing, mortgage,... you name it. Oddly similar to the US's montage crisis in 2007-2008.

[Drawesome]

Winter is coming for Germany. EU is not going to spend a winter with no Energy. I believe they may force an end to the Ucrania war.

[pooya87]

The US isn't that vulnerable to the high debt-to-GDP ratio since the petrol dollar and dollar as the main currency for world trade, main in foreign reserves of many countries.

But the situation with Petrodollar is not the same as before. Many countries are dumping it. For example over the past couple of years two of the biggest energy exporters (Iran and Russia) have been using other currencies. One of the biggest oil importers (China) has been using CNY to pay, India is also starting to use Ruble, etc. to import energy. Another big oil exporter (Saudi Arabia) is also selling some of its oil in other currencies such as CNY.
In other words USD used to be global currency, it now mainly exists in Europe while it is slowly being abandoned in other regions.

I agree about the points you raised about China.

Multiple Chinese enterprises are leaving US economy. PetroChina ($130 billion), Sinopec ($70 billion), Aluminum Corp of China ($10 billion), ... are all leaving US stock market (NYSE).

[zasad@]

China's problem is that ... the Chinese economy is the most natural and largest bubble in the world economy, in world history! And the funny thing is that the Chinese economy is exactly the same as the crisis of 2009, when the real estate bubble burst! They did the same, only within the local market. And the result was not long in coming. But in the case of the Chinese economy, everything will be even worse - not a segment of the market, but the entire economy will collapse, because. In China, the domestic market is very "fragile" and everything is highly dependent on all internal processes. After the "explosion" of the real estate market, the construction-related market has already begun to crumble (from the production of concrete, building metal to manufacturers of electrical wiring, laminate and household kitchen appliances) ... And these are millions of workers who will soon be left without work, companies will stop paying taxes , and .. and further in a vicious circle. The only thing to say is that this will not happen this year for sure, China still has some inertia.

PS by the way - the United States officially began to withdraw production and technology from China, and transfer it to the United States, to solve 2 problems:
1. Solve internal problems, "burn" tons of money printed, give new jobs and boost the US economy. At the same time, provide their manufacturers with microelectronics (microchips, etc.)
2. Show China its place, and force it to be more accommodating.

Have you ever wondered why large factories from the USA and Europe moved to China?
Anyone who studies economics knows that the production of goods in China is more profitable than in the US and Europe.
Therefore, the US government will have to spend a lot of money to compensate for these losses and train its engineers.

The situation with Taiwan is even more ridiculous for the US. Chips are made in Taiwan for the US military industry, and they are located near China and Russia. It doesn't matter that Russia will locate military production in Cuba.

[Gyfts]

...

I'm critical of the U.S. debt, only for the reason that USD acts as the current currency reserve at the moment -- but the debt is sustainable if the U.S. economy grows. It's a dangerous game to play, but I'd be more concerned about the fact the U.S. is in a recession and birth rates seem to be declining which means there isn't enough economic output to support the debt. Inflation compounds the issue to the extent that it accelerates other countries dumping USD from their currency reserves as its purchasing power decreases too quickly over time.